Are there ways to deal with defined benefits schemes other than buyout or run-off?

Michelle Lewis, senior policy adviser, National Association of Pension Funds

The one option we would want schemes to consider is a slight redesign to ensure their longevity and to ensure that people can remain in their DB schemes for the long term. This could include things like changing the accrual rate, or changing the pension age perhaps. Or maybe even looking at some of the other benefits that go with the scheme and re-designing the whole package. This way everybody can remain a member and you don’t end up with that big divide between defined benefit and sort of defined contribution arrangements.

We would like to see the government allow schemes greater flexibility in the arrangements they offer through defined benefit and look at the alternatives to just saying, ‘OK, we will close the scheme to either new entrants or, in some cases, to future accruals and move straight over to a defined contribution scheme.’

Among the things we are pursuing at NAPF are deregulation, simplification and making it easier – especially for SMEs which probably won’t be able to run these schemes – to take a more flexible approach to the way in which they offer defined benefit pensions.

We are supportive of seeing DB schemes out in the long term.

The issue is really about the kind of regulatory regime that is in place for current DB schemes and whether it can be made more flexible so as to encourage, or allow, DB schemes to run in the future.

It’s really about looking at some of the detail and ensuring that the regulations and guidance currently in existence can be lifted to allow those employers that want to make a change to do so.

What are the risk differences between defined benefit and defined contribution schemes?

Stephen Yeo, senior consultant, Watson Wyatt

The easiest way of summing up the differences is where the risks are borne. With a defined benefit scheme almost all the risks are borne by the employer – the risk that the contributions made might have to rise, that people might live longer, investment returns and so on. With defined contributions schemes, you can almost always cap your contributions at a fixed rate and the risks tend to be borne by the employees.

If their longevity improves, their pension will be less by the time they come to buy an annuity. And if investment markets don’t perform, they will get less.

Conversely, if your investment performs well, that benefit will go to the employee, whereas in the defined benefit scheme that would have accrued to the employer. That is why we saw contribution holidays through quite a lot of the 1980s and 1990s because the investment market was doing very well.

The interesting thing about the pension crisis is the wide range of solutions being adopted. There isn’t a one size fits all. There are some who are going for the immediate buyout if they can and there are others looking to reduce their costs – most people are looking to reduce their costs.

Some are looking to reduce them and contain them at the lower level and there are others for whom their final salary scheme is now doing what it was set up to do – attract, retain and reward staff.

If you were an oil company or bank, the extra cost of a decent pension scheme isn’t very significant in the context of the whole. For them the defined benefit scheme may now be doing something and making people want to come and work for them and some of the large manufacturers as well.

What is the answer to tackling a company's pension scheme deficit?

Jarrod Parker, product development manager, Alexander Forbes Financial Services

One size doesn’t fit all. For multinational companies that have more money coming in, continuing to run a defined benefit scheme can be more practical. The issues at SME level are totally different. Trying to change the accrual or change retirement age could be seen as adopting a half-way approach that doesn’t necessarily cap your liabilities.

Running off is a popular option. By that, most people are probably suggesting they will try to fund contributions into the scheme to enable them to reach a position where they could look to buy out all of the benefits over a 20-year period. Our own surveys show that almost half of DB schemes are looking to potentially close the future accrual in the next five years.

An inducement offer is where the company makes an offer to a member over and above the transfer value they would be entitled to in order to try and reach a figure that reduces the liabilities of the final salary scheme. We have to be careful that a lot of people do see DC as a poor relation, which isn’t always the case. DB schemes can achieve very worthwhile pensions.

There is a right time to close a DB scheme and you can smooth the process. If its costs are spiralling out of control, or the scheme is not achieving what it set out to achieve in terms of recruitment, retention and reward, closing the scheme is often the right thing to do. Communication is the key and members must feel engaged. They must have presentations, one-to-ones and the chance to ask questions. It is key to make sure they understand they are not losing a benefit.

Chaired by Gavin Hinks

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