No great surprises in yesterday's report from KPMG, on the funding position of the top UK DB pension schemes, but interesting that they feel the "tipping point" has been reached, at which schemes are paying out more on retired scheme members' benefits than on current members' benefits. What's more, 22% of the top DB schemes "face no prospect of clearing pension deficits from discretionary cashflow over any reasonable time period" – a sobering thought given that cashflows are unlikely to improve in the foreseeable future.
The findings echo the views of senior figures in the pensions and investment industries revealed in a Penrose survey earlier this week, of whom 94% thought private sector DB schemes are "unsustainable" and would close to existing members for future accruals in the next couple of years.
With DB schemes seemingly being closed on a "weekly basis", the end of DB provision in the private sector looks to have been factored in by most commentators as pretty much a fait accompli. The debate instead is moving towards what will replace DB schemes. Here the picture is much less clear cut. Many fear employers will revert to DC schemes with contributions levelled down to the minimum prescribed under the Personal Accounts system. Others, such as Adrian Waddingham interviewed in FTfm this week, feel some will bring in some form of hybrid scheme, comprising elements of DB and DC.
The real "tipping point" in all this has more to do with the shift in the balance of risk between the employer and the individual. It's about the labour market and life expectancy. During the post-war period, when many of the DB schemes now facing closure were originally set up, there was a shortage of labour, so employers introduced final salary pensions as a way of attracting workers. Life expectancy for the average UK male was somewhere in the low seventies, so the cost of providing this benefit to people retiring at 65 was relatively low. Nowadays, with unemployment at 2.4 million and rising, employers don't need to go to such generous lengths to attract staff. And with life expectancy in the mid-eighties (and also rising), but retirement age still 65, the cost to employers is significantly greater. To put simply, if a trifle brutally: in 2009 can any rational employer justify offering a DB pension as an employee benefit? The answer, sadly, seems to be a resounding "No".
CM
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Great post about the fall of the DB funds. Here are some thoughts (retrospective wisdom!) on what happened in Australia when accumulation schemes took over…
ReplyDeleteAustralia's compulsory national pensions scheme (9% of all individual’s wages MUST be saved in superannuation under law) was introduced in 1992. It helped hasten the demise of DB schemes. DB funds (just like a decent age pension) were not viable long term given the number of aging baby boomers and our projected support ratio (workers to retired people).
Collectively Australians now have the world's 4th largest managed funds pool thanks to the national retirement savings scheme.
While the scheme is regarded as a global leader it's not been all smooth sailing. One massive downside is that most average workers now have considerable stock market exposure. While they can't access their money until retirement many have taken a huge hit from investment markets thanks to balanced or growth asset allocations. It’s been devastating to many pre-retirees or those already drawing a pension.
Now the large pension funds and asset managers have had to communicate (http://financialservicesmarketingpr.blogspot.com/2009/06/what-do-you-say-when-investors-have.html) some tough messages about the very long term nature of investing for retirement.
While enforced accumulation has worked really well the public education and advice needed to go with it is mammoth – otherwise unsophisticated investors simply are not protected through market cycles.