Defined Benefit  

The changing role of DB pensions

  • List the reasons DB pensions are disappearing from the private sector.
  • Identify what is behind the trend for transfers and the risks this has created.
  • Describe whether this will drive new products in the market.
The changing role of DB pensions

Defined benefit pensions, once so dominant in the UK occupational pensions landscape, are slowly disappearing from the private sector.

This long-term trend now feels unstoppable.

There are only about 1.2m active members still accruing benefits in private sector DB schemes today, and 40 per cent of private DB schemes are now closed to future accrual – almost double the proportion that were closed to accrual a decade ago, according to The Pensions Regulator.

TPR reports only 14 per cent of private sector DB schemes were open to new members and future accrual by the end of 2018, compared to 43 per cent in 2006.

By contrast, there were 8m active members in defined contribution schemes by the end of 2018, a number that has grown dramatically since the introduction of auto-enrolment in 2012.

With collective defined contribution (CDC) arrangements also set to replace some DB schemes over the next few years, there seems little doubt that the old, paternalistic form of occupational pension provision is in permanent decline.

But we have not yet reached the stage where wealth advisers can afford to forget about DB pensions.

For the 6m people who are active or deferred members of private sector DB schemes, these pension entitlements may account for a very considerable share of their overall wealth portfolio.

Our research suggests that as most of the youngest active members of DB schemes are only now reaching their 40s, private sector DB pensions will continue to feature in some conversations between advisers and clients about wealth and retirement planning for at least another 20 years.

But it also suggests that the subject will have disappeared from most of those discussions by 2030.

Buck clients with DB pension benefits who are still working are currently, on average, between five and 10 years away from retirement.

Accelerating the trend for transfers

Traditionally, wealth advisers have viewed DB pension benefits as potentially very valuable, secure assets that enable greater risk-taking in other parts of a portfolio.

If not transferred, DB pension benefits provide the bedrock of retirement income, offering a steady stream of income alongside the state pension.

It would once have seemed unthinkable to transfer such a potentially valuable asset.

However, attitudes have changed over time, beginning with the advent of personal pensions in the late 1980s, which gave individuals the ability to consider transferring DB entitlements in order to meet retirement needs in a different way, albeit accompanied by the emerging risk of poor advice and optimistic assumptions.

A slow, but steady trend towards transferring DB entitlements then accelerated in 2015, following the introduction of pension freedoms.

The number of DB to DC transfers grew significantly between 2016 and 2018 - 5,056 people transferred pension assets from DB to DC arrangements in the six months up to March 2016, but that figure had grown to 34,738 in the six months up to March 2018, according to Financial Conduct Authority figures obtained by TPR.