The Department for Work and Pensions (DWP) green paper on the future of defined benefit (DB) pension schemes has been criticised for complacency and potentially damaging pension benefits.
The DWP is consulting on a range of issues surrounding the UK’s DB funds which manage £1.5 trillion in assets, or roughly three-quarters of the UK’s GDP, with 11 million members. The issues include funding and investment, employer contributions and affordability, member protection and the consolidation of smaller DB plans.
However, the green paper has run into criticism over a possible switch in the inflation-linkage measure for DB pensions from RPI to CPI, which could save an estimated £90 billion in annual increases, or over £20,000 over a member’s life. Looking at the paper, former pension minister and pensions campaigner, Baroness Ros Altmann, said: “The overall tone of the paper is based on an assumption that there is no real crisis in pension affordability and that employers can generally afford the liabilities they are sponsoring. This complacency reflects short-term thinking, whereas this green paper should be an opportunity to plan for the longer-term outcomes for members of such schemes.”
Altmann said that with nearly 90% of private sector DB plans closed to new members, the government should put plans in place for the run-off of DB plans. “Any period of economic weakness is bound to lead to greater sponsor insolvency and we should be planning for such problems now, as it will take some time before arrangements can be agreed and established,” she commented.
However, on consolidation, Altmann was supportive. “Establishing a Central Discontinuance Fund or ‘SuperFund’ that can pool many schemes together, reduce running costs and take advantage of more diversified asset allocation would cut costs and enhance potential benefits. Local authority schemes are already being required to merge their investment allocations. Such models could be used for private sector schemes in future too.”