Former pensions minister Ros Altmann has criticised the government’s Green Paper on defined benefit (DB) pension plans as too complacent about the sustainability of these schemes.
The green paper, published yesterday (20 February) outlined a series of proposals for managing DB schemes, including consolidating them into a 'super fund' to lower the costs of servicing them, and allowing struggle businesses to severe the automatic link to minimum annual increases based on the retail prices index (RPI).
However Ms Altmann said the measures did not go far enough.
She encouraged the government to plan for the medium to long term risks, warning any period of economic weakness would lead to greater employer insolvency.
Nearly 90 per cent of all DB plans have now closed, leaving businesses with a legacy liability that will increasingly put younger workers’ jobs and pension prospects at risk.
“The ongoing DB pension schemes will also increasingly make workforce rewards inequitable, with the older, longer-serving workers who may still be in the DB scheme having far better pension benefits than the younger, newer employees who will have defined contribution pensions with lower contributions,” Ms Altmann said.
The government's green paper suggested the cost of pension accrual for a typical UK DB scheme has risen from around 24 per cent of salary in 2009 to 50 per cent of salary in 2016, but average contributions to defined contribution (DC) schemes are nowhere near these levels.
“The greater the cost of supporting the legacy DB scheme, the lower the resource potentially available to pay into younger, newer workers' DC schemes. This is bound to lead to tension, with employers looking for ways of removing responsibility for these legacy liabilities,” Mr Altmann said.
The suggestion in the green paper is that employers will not be willing to support these DB schemes over the long term, so consolidation through a central discontinuance fund or 'super fund' could pool a number of schemes together to reduce running costs and take advantage of a more diversified asset allocation.
Ms Altman added that the green paper was right to call for broader asset allocation strategies and greater exposure to alternative asset classes, and called it “ironic” as she first suggested a similar plan when setting up the Myners Review for the Treasury in 2000.
Relaxation of annuity requirements would also aide the situation, Ms Altmann said, criticising the green paper for failing to "sufficiently explore the need to relax the requirement for schemes to buy out benefit in the annuity market”.
“Overall, the green paper will generate useful debate, but the need for action is greater than suggested by this paper. Many employers are struggling with DB scheme costs and as we leave the EU, British businesses will have many other issues to deal with,” Ms Altmann said.
“A system that helps them manage legacy liabilities is needed for the coming years.”
julia.faurshou@ft.com
