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Steve Bee: Knowledge is power on DB schemes

steve bee

Pensions are pay. The pension fund backing a defined benefit scheme is the deferred pay of a company’s employees, ex-employees and, quite likely, retired employees. It does not belong to the company, nor does it belong to the Government.

Once commonplace, DB pension schemes are now dying out in the UK. The modern trend is for company pension schemes to be structured around defined contributions instead. Company pension funds accruing on a DC basis are also the deferred pay of a company’s employees, ex-employees and, sometimes, retired employees.

If we are lucky, by the time we reach retirement age we will have accrued two major lifetime assets: the houses we live in and the pensions we will live on. Both purchases are likely to be of similar value if we have been in a workplace pension scheme that encouraged the deferment of high levels of income. Most DB schemes did just that, as do some DC schemes.

There is no reason why a DC scheme should encourage employees to defer lower levels of income than is the norm for a DB scheme, it just happens to be the way it is in this country. It is something employers, the pension industry and the government have gone along with for many decades now. It is the current fashion, if you like, for employees in DC schemes to defer less income for later in life than employees in DB schemes. There is no sensible reason for it.

The main advantage employees in DC schemes have is that it is easy for them to appreciate how much (or how little) money they are putting aside for retirement. Their deferred income is held, in effect, as a cash account in their name. They can keep track of the value of their lifetime pension asset just as they can keep track of the value of their other likely lifetime asset, their house.

Employees in DB schemes are not so fortunate in that respect. While they will know to the penny the likely value of their house, they will often have no clue whatsoever as to the value of their assets in the company pension scheme. In my opinion, that is both crazy and dangerous.

I am of the view that every member of a DB scheme should be told the cash transfer value of their accrued pension entitlements on request, and at least annually, as a right. Trustees of such pension schemes should be required to make such important information available.

A so-called black hole in a DB pension scheme is not a black hole in a company’s accounts, nor is it a black hole in the Government’s revenues. It is a black hole in employees’ savings from income they have deferred for later in life for their retirements. That is a serious issue that should also be reflected in each employee’s annual statement of pension value, so affected employees are aware of the deficit in their fund and how it may affect them personally well before they reach retirement.

Steve Bee is director at Jargonfree Benefits

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Bryan Robinson 3rd June 2016 at 4:23 pm

    Interesting article. Perhaps if members were told of their CETV each year it would help them value this precious benefit, though no doubt it would lead to some wanting to know how they can get their hands on the ££! Regarding reduced contribution rates in DC schemes perhaps in part this is due to the fact that people don’t mind paying for a guaranteed benefit, whereas paying in to something that sometimes goes down in value, and when looking at your projection gives a miserly pension puts people off? It would be nice though if employers would pay 15% into DC schemes so long as employees paid 5% which I think is about the current contribution averages in private sector DB(?) Dream on….!

  2. Pensions Manager 7th June 2016 at 12:12 am

    DB schemes also were often contracted-out whereas most DC schemes were not. Therefore it is necessary to take the additional NICs into account rather than a simple contribution comparison. Although since April contracting-out has of course finished making future comparisons more straightforward. DB members can obtain a CETV once a year free of charge and the value for lifetime allowance purposes is routinely shown on annual benefit statements.

    Of course we need to encourage higher levels of saving in DC schemes – preferably low cost large schemes that offer better value. Not the rip-off personal pensions still routinely pushed by some parts of the industry.

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