Employers providing DC pensions pay far less into them than those providing DB schemes
Sooner or later, we will have to accept the fact the golden age of company pension provision in the UK is over. It has been for some time now, yet the pensions industry and the government are still in denial.
The problems have been there from the start. Yes, gold-plated defined benefit pensions once provided millions of people with enormously valuable assets that dwarfed the paltry state pension payments available.
The state could never be as generous to its population. No social contract would survive the long timescales needed to bring such plans to fruition for all. It can only ever provide pension entitlements seen to be affordable to working contributors and fair between generations; a rift all too easy to exploit in the twists and turns of political rivalries over time.
But even in its heyday, that gold-plated company pension sector was only ever able to provide for the half of the population that worked for the biggest employers – including, of course, the biggest of all: the government.
Today, the provision has declined even further. Employers are more likely to offer new entrants pension benefits on the defined contribution basis rather than DB.
There is nothing wrong with that. Indeed, DC pensions can offer far more flexibility to people later in life than DB schemes. If the same level of contribution is made to a DC scheme over a working lifetime as the level of contributions required by a generous DB scheme then, by and large, the value of the accrued assets would be the same.
But the problem is that employers providing DC pensions pay far less into them than those providing DB schemes. And that applies even when it is the same employer running both types of scheme.
This is a problem no one seems comfortable talking about these days. It is the elephant in the room.
It is true we now have millions more saving since the pension reforms of 2012. But the price we have paid for that – the demise of the state second pension – is something understood by no more than a handful of people. For this reason, it is not part of the national debate and likely never will be.
In the meantime, the river of private pensions in the UK will only get shallower as it widens out to include so many more of us.
Steve Bee is director at Jargonfree Benefits