A few decades ago, it was not at all unusual for ordinary workers in the UK to have a defined benefit pension scheme provided by their employer.
That has all changed now, of course. Very few employers now offer DB schemes to new workers and the schemes we do have, in the private sector at least, are becoming more anachronistic as time goes on.
Perversely, just as our golden age of widespread DB provision appears to be coming to an end, the real power of those arrangements has been highlighted by pension freedoms.
People have only now started to wake up to the fact a good pension costs what most of us would regard as an absolute fortune to buy.
The annual costs for an employer to provide DB pensions based on a 60th of an employee’s salary at or near retirement for each year of pensionable service were significant. Such a scheme would have cost something like 20 to 25 per cent of payroll every year.
While most private sector employees would have had to meet some of the cost of the pension themselves, their contribution rate would have rarely been greater than 5 or 6 per cent of salary. The lion’s share of the cost – and all the risks – were borne by employers.
Such costs and risks are no longer deemed sensible to employers and I doubt people are surprised to hear that many are now opting to provide pensions on a defined contribution basis instead, meaning they get control of the costs and do not bear any of the risks previously associated with pension provision.
But at the same time, employers have also dramatically reduced the amount of money they are prepared to commit to their employees’ pensions. This is something that will impact generations of future pensioners.
There is nothing wrong with employers reducing their commitments to deferred income for employees. Most would probably prefer higher take-home pay to higher levels of deferred pay anyway. But that is not the point.
What is important is that employers and employees alike try to understand the lessons that come from pension freedoms.
Twenty per cent of payroll paid into a pension pot year on year is the equivalent of saving one pound in every five earned over an entire working life. Very few people do that voluntarily. Yet, once upon a time, millions of ordinary people did just that.
Something fundamental has changed and the UK is going to struggle to find its pension mojo once more. Perhaps it never will.
Steve Bee is director at Jargonfree Benefits