How far should pensions be a Management problem?
Workplace pensions issues have become a fraught area for employees and employers alike in recent years. Public sector people are up in arms about changes to their pension schemes and for private sector people, the old defined benefit schemes have closed to be replaced by defined contribution arrangements. We also have the upcoming issue of auto enrolment (which I intend to be the subject of a separate blog shortly). But how far are pensions issues a management problem?
The pension arrangements are usually lumped together under the title ‘Benefits’ along with health schemes and holiday pay etc. This blog asks whether there is sufficient understanding by managers as to what pensions means, the impact of changes to schemes i.e. the transition from defined benefit to defined contribution and whether better understanding by managers could help.
How comfortable are you as managers in your understanding of pensions issues and in speaking to others about them? There are specialist people who can help with pensions issues but I want to get a better understanding of how managers see pensions issues and understand them. I set out below one of the most significant changes to private sector pensions over the last few years.
Closure of Defined Benefit Schemes
Defined benefit schemes are ones where the scheme promises to pay a pension which is calculated as a fraction of your salary near to the date of retirement. Scheme members pay a contribution and the rest is paid by the employer. The major advantage of these schemes for employees is that there is a promise of a benefit for pension in retirement. However, these schemes are very expensive to run because:
· People are living much longer than they used to in retirement
· In a low inflation world, the scheme investments have not performed as expected.
As a result employers find they have to pay more and more into the scheme and there is a deficit between the scheme assets and the total liabilities. As a result there are hardly any DB schemes which are still open to new members or future accrual of new benefits.
Rise of Defined Contribution Schemes
Unlike DB schemes, defined contribution schemes make no promise of a benefit when you retire. These schemes are in effect savings vehicles into which many employers and employees pay a contribution. Like all contributions to DB schemes, these contributions are made before tax is deducted. A major advantage for employers is that DC schemes are much cheaper to run and there is no need to pay extra to fund a deficit (as no deficit can exist). From the employees point of view there are some problems.
· The pension benefits will be only that afforded by the accumulated pension pot at retirement
· He/she will have to but an annuity on the open market from a life office and annuity rates change and have become more expensive
· If insufficient contributions are paid in, small pensions will be payable.
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