http://www.pensions-expert.com/Comment- ... to-be-felt
The Pension Protection Fund's latest edition of the Purple Book documents the continued decline of defined benefit schemes in the UK.
In 2006 there were more than 3,300 DB schemes eligible for the PPF that were still open to new entrants. In 2017, there are fewer than 700. That is 80 per cent of our DB schemes closed to new members in the past decade, with 39 per cent of PPF-eligible schemes closed to future accrual as well – the corresponding figure in 2006 was only 12 per cent.
The stark statistics also give a clue as to why this has happened, with DB schemes now investing twice as much in bonds than equities, rather than the other way around. The actuarial valuation methodology favoured by the Pensions Regulator encourages this trend into very low-yielding assets and makes pension schemes extremely expensive.
That might just be a recognition of the true costs of the promised benefits, but only because we have systematically increased the burden on employers from a promise based on their best endeavours to a largely guaranteed outcome.
In isolation, making sure that members receive their full benefits from schemes is a laudable intention. The unintended consequence is that some of the 2.3m active members who have lost their DB pension accrual might have been able to keep earning that pension for at least a bit longer if we had been a little more relaxed about funding targets.
Employers who still want to support their staff with a decent pension in retirement have to pay through the nose to do so.
DC contribution levels 'a disaster'
The replacement of DB schemes with defined contribution schemes saw the average employer contribution rate fall dramatically to about 6 per cent of earnings, with a further fall to 3 per cent of the lower band earnings where employers are dropping to the auto-enrolment minimum level.
That is a great success story for getting new savers into the system, but it is a disaster for those who were looking forward to drawing a DB pension.
It is going to take many years before the true pain of the death of DB schemes hits fully. We can still try to mitigate with risk-sharing schemes like collective defined contribution, but I suspect it is too late and that we will just be fiddling while Rome burns.
For once though we are genuinely all in it together, as so few people still get DB benefits – at least in the private sector.