Defined Benefit  

Defined benefit pension costs hit pay rises

Defined benefit pension costs hit pay rises

Around half of employers (53 per cent) have revealed costs associated with their defined benefit (DB) schemes are having a negative impact on pay increases.

A survey by the Association of Consulting Actuaries (ACA), which polled 466 employers, found that 80 per cent of the respondents with defined benefit funds believe their costs are having a negative impact on inter-generational equity.

Almost half of employers (42 per cent) stated defined benefit costs are also having a negative impact on contributions into newer schemes.

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According to Bob Scott, chairman of the Association of Consulting Actuaries (ACA), these findings paint a picture of DB schemes where “complexities introduced over the years – largely by dint of public policy – have taken their toll”.

He said: “Legislative and regulatory changes seem unremitting and are continuing to present challenges to sponsors and trustees.”

The survey also showed that 55 per cent of employers believe further legal restrictions will hasten the closure of more schemes to future accrual.

However, 79 per cent support increased punishments for those caught mismanaging schemes and 68 per cent back new criminal offences for directors who ‘deliberately and recklessly’ put at risk the ability of a scheme to meet its obligations.

Mr Scott said: “Whilst a majority of employers fear more legal restrictions will accelerate scheme closures still further, they seem sanguine about further legal restrictions being placed on sponsors and trustees in the upcoming government white paper.

“That said, the vast majority also expect support in the white paper for some greater flexibility in law to adjust future pension increases if they are in financial difficulty.”

The Department of Work & Pensions (DWP) announced in July that it will launch a white paper on the future of DB pension schemes in the coming months.

This follows a consultation which was launched in February into what needed to be done to ensure confidence and secure the future of these schemes.

According to Nathan Long, senior pension analyst for Hargreaves Lansdown, “there is a huge gulf between the monies that pour into DB pensions and the contributions that go into more modern defined contribution plans”.

He said: “However, all is not lost. The playing field will level out somewhat by April 2019, as the minimum contribution into a workplace pension will hit 8 per cent with many people calling for this minimum to ultimately climb even higher.”

For Mr Long, policymakers should “resist calls to water down existing defined benefit promises”.

“Trust in the pension system is already very low and reducing the value of people’s pensions is hardly likely to inspire renewed faith,” he concluded.

maria.espadinha@ft.com