Insider Business Club: pensions -beneficial changes

Are there ways to deal with defined benefits schemes other than buyout or

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

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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