Alternatives to DB closures
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The Department for Work and Pensions has published an information note in a bid to encourage more employers to consider risk-sharing options rather than closing down final-salary pension schemes.
It outlines a range of risk-sharing arrangements available and gives case studies of firms that have schemes.
The report explains that cash-balance schemes, used by firms including Barclays, guarantee a pension pot to scheme members at normal pension age to buy an annuity. Hybrid schemes often involve a defined-contribution scheme underpinned by a low level of final salary-benefits where the member gets the higher of the DC pot,or the defined-benefit pension at retirement age.
Career-average schemes, used by Morrisons, involve employers allocating a percentage of salary, reviewed annually, to the employee’s pension pot. Final benefits are paid as with a traditional DB scheme.
Longevity-adjusted DB schemes, which John Lewis has opted for, adjust benefits to take account of changes in longevity for future accruals only. Self-annuitising hybrid schemes involve benefits being money-purchase in the build-up phase, but the annuity is provided by the scheme unless the member uses the open market option.
Other options involve changing accrual rates for future accrual and increasing pension age.
Private pensions policy and regulation director Sue Barbosa says: “Final-salary DB and DC schemes polarise risk. We hope that this note has given employers a better idea of what risk-sharing options may be available to them.”
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