Closing days of DB schemes
Spiralling costs, regulatory obligations and longevity are among the critical factors putting final salary pension schemes on the proverbial chopping block.
Recently, the £2.4bn (€3.5bn) ScottishPower pension fund joined the ranks of Rentokil, Philip Green’s Arcadia retail group and the Co-operative Group, after proposing to shut the doors of its defined benefit (DB) scheme to new members.
A ScottishPower staff report stated: “Like the schemes of all big companies, ScottishPower’s is under increasing funding pressure as people live longer and investment returns slow.”
The UK’s National Association of Pension Funds (NAPF) seemingly agrees: “Our view is that, for a variety of reasons - principally greater life expectancy, additional regulatory costs, etc - employers are finding it increasingly difficult to sustain the cost of providing final salary pensions.”
The Co-operative Group’s decision to shut its final salary scheme and create a single £4.7bn (€6.8bn) career-average salary fund was also based somewhat on a “something is better than nothing ideology”, that is, it is better to slash pension benefits than close final salary schemes altogether.
According to the NAPF, “From the employee’s point of view, the changes may mean less generous pension arrangements. “But if retaining a final salary scheme threatens the survival of an employer (not unheard of in the current climate), surely it is better to have an alternative pension arrangement and a job, than to lose both your pension and your job.”
The NAPF, therefore. found it “encouraging” that employers were finding ways to manage costs sensibly, while retaining “valued” pension provision for employees.
But unions have lashed out at companies’ plans to close scheme doors to new members. Manufacturing union Amicus accused ScottishPower’s decision as “cynical” and “driven by the board of directors efforts to prime the company for sale which will result in lucrative share options for them”.
A spokesperson for the energy giant dismissed Amicus’ claims as “nonsense” and added: “It the_closure is to secure the current scheme and offer new entrants an attractive and competitive pension package in line with what the vast majority of companies are doing.”
Meanwhile, the move by the Co-operative group attracted much criticism from the Transport & General Workers’ Union, which has not ruled out industrial action.
Aon Consulting chief actuary Donald Duval stated: “The trade unions are fighting the wrong battle here. Even after these changes, workers for these companies will have reasonable employer pensions (if they choose to join the scheme). The trade unions should be concentrating on the 70% of private sector workers who have no company pension at all.”
In a statement to the media regarding Arcadia and the Co-operative Group announcements, Duval said: “We are surprised that companies making such radical changes have not acted more effectively to reduce their risks.
“By retaining the full defined benefit structure, they are retaining the entire regulatory risk of these pension schemes going forward, and historically this has been the biggest cause of the increase in companies’ pension costs.
“As Turner correctly identified, a key reason for the existing problems with defined benefit schemes has been that companies underestimated this regulatory risk over the past 25 years and consequently ended up with schemes which cost vastly more than they ever intended. Turner’s conclusion was that rational companies would not run these risks in future.”
Even decisions by international employers affecting pension schemes in one part of the world have attracted anxiety from employees in other parts.
The recent plan by IBM to freeze its US defined benefit scheme and “redesign” its 401(k) savings plan by January 2008, raised fears among workers about the future of the UK pension fund.
IBM stated that pension plan changes for 2006 are under review “in several other countries”, and one report stated that the move is part of a global shift from DB to DC schemes. The firm believes it will have “competitive advantages” in attracting workers and managing costs. The change is expected to save the Corporation between $450m (€370.5m) and $500m in 2006, and between $2.5bn and $3bn between now and 2010.
“It would be surprising if the IBM UK DB scheme members did not fear a freezing of the scheme or a continued degrading so as to make the DC scheme appear more attractive by comparison,” said of the Association of Members of IBM UK Pension Plans (AMIPP), Brian Marks.