Many companies setting up defined-benefit schemes in the 1960s and 1970s did so in the expectation they would be providing the best future for their employees that they could afford.
Since then, two main factors have made such schemes unaffordable – increasing longevity and successive Governments’ intervention to raise the level of benefit which the employer is obliged to provide. This is like budgeting to buy BMWs for your staff, only to find the Government insists they must be Rolls-Royces.
The effect, as we now know, is to increase the number of employers being forced into liquidation while more and more of those that remain, having ceased future accruals and moved to personal pensions, now only budget for a Mini for their pensioners.
One solution is for the Government to legislate to allow employers to reduce the benefits for deferred and member pensioners back to the level of the planned BMW without breach of employment contracts, to the extent that the increased costs result from successive Government legislation.
There will be objections that this will further damage the faith employees have in pensions at a time when it is essential that we rebuild that faith. However, the reasons for the change are easily explicable, with employers being asked to do what they originally committed to, plus funding the increase in longevity.
The great advantage of this solution over Mr Lothian’s suggestions is that it is an holistic solution which takes into account the ben- efit` of keeping employees in ongoing employment, whereas current legislation puts preservation of pension benefits ahead of future employment. This is something the UK simply cannot afford, especially in a recession.
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