Defined benefit pensions come under scrutiny
The widespread and continued closure of defined benefit plans have made for a climate of uncertainty and aversion amongst participating companies and members alike. According to reports from the Pension Protection Fund and The Pensions Regulator, the number of schemes open to accrual continues to fall, as do levels of membership. As such, schemes are being made to seem an increasingly unattractive option to today’s overly risk conscious climate.
Consensus in the industry suggests that while legacy schemes look to thrive, the prospective opportunities for defined benefit schemes are invariably uncertain outside of large employers and the public sector. A string of notable closures have meant for a significant loss of confidence in the integrity and feasibility of final salary schemes in small and medium sized businesses.
One such instance of closure is that of children’s charity Barnardo’s, who were – in January of this year – forcibly urged into closure with standing pension liabilities of £548m and a shortfall of £83.9m. Director of finance, Kevin Barnes said: “The decision to close this scheme was to do with the size of the liability and the risk of this increasing further… There was also a secondary point, which is that the members of the scheme are a diminishing part of the workforce, and we were paying a disproportionate amount for their benefits compared with the rest.”
Though new members to the scheme were rebuffed from 2007 onwards, the system is – as of the end of March – to be closed entirely. The British charity will continue to offer a defined-contribution scheme, granting funds in supplementing employee pensions; though far short of the retirement guarantees offered previously in their defined benefit scheme.
A lack of confidence
Continued scheme failures of a similar nature have contributed to a growing sense of crisis amongst those looking for an attractive means to a healthy pension. In addition to the pitfalls and inherent sense of risk pertaining to financial crises is the deep set cultural aversion of what many consider to be a jeopardous basis for investment.
Further supplanting the potential benefits of defined benefit pension plans are deep-set mistrusts in the intentions of collective vehicles. Through the past decade there has been a sustained departure from collective solutions and a shift more towards individual means of harbouring savings. Many potential members underestimate the benefits to be reaped from collective schemes, and are – in these instances – dictated by a deep-set mistrust of collective vehicles.
Further bolstering a mounting uncertainty of sustainability are an implacable number of regulatory requirements impeding on the attractiveness of defined benefit schemes. Some analysts and commentators have suggested that each legislative change is ‘another nail in the coffin’ of defined benefit schemes and that without stable terms of being, both companies and members alike are increasingly unlikely to risk investment.
Without the comprehensive insurances of working for a large company or for the public sector, employees are simply unwilling to stake a great deal of money on the viability and continued sustainability of small and medium sized companies.