50% of remaining DB schemes to go through change in next three years
What a difference two years make.
Boris Johnson is now the Prime Minister, Liverpool finally became Premier League Champions and, sadly (for me), Huddersfield Town are back down in football’s second tier. And then there is COVID-19.
Who could have predicted any of the above? Admittedly, you didn’t need a crystal ball to foresee Huddersfield’s struggles against the English footballing elite, but I am forever the optimist.
Translate that to the world of UK pensions. Whilst we remain in an industry which is synonymous with perpetual change, few may have predicted the scale of some of the developments we’ve seen in the last two years: proposals that could lead to a more prescriptive funding regime, the likely demise of the RPI, the rise of the superfund, the consolidation of smaller defined contribution (DC) schemes and the continual tinkering with the taxation of pensions, to name but a few.
And whilst I’m not a betting man, I’d be pretty confident in saying that more change is on its way. Take defined benefit (DB) provision as a great example.
Two years ago, back in 2018, we ran a pension strategy survey across FTSE 350 companies. Of those surveyed, 30% suggested they would remain open to some form of future DB accruals by the end of 2020 – a predicted fall from 46% offering this form of benefit at that time.
Fast forward to the present day. Our market data shows that only around 25% of relevant FTSE 350 companies remain open to some form of DB accruals - and we are not even at the end of 2020. This acceleration in “hard closures” reflects a number of factors including continuing escalation in costs, legislative/political uncertainties, the changing face of the workforce and the continued trend towards de-risking. Add to that the open pension consultations underway by FTSE 350 companies and the number of schemes open to accrual could reduce further by the end of the year.
However, it is behind these headline statistics that the more interesting stories lie. Whilst many employers are simply cutting their ties with DB altogether, an increasing number of employers are looking at taking creative steps to preserve some form of DB accruals for their employees.
Perhaps this shouldn’t come as such a surprise. DB pensions remain a hugely valued employee benefit – a position championed by the unions and the press. But the traditional model which delivers a gold-plated pension promise with the employer carrying all of the risk is no longer sustainable for many. Companies have however been able and willing to find a more balanced way to provide a DB-type benefit promise going forward.
For them, the choice wasn’t seen as a binary one: either do nothing or close their DB scheme. That’s the most common misconception when looking at addressing cost/risk issues with a DB scheme – and can be a costly one. Companies have been able to find a design without a range of solutions which facilitated more risk-sharing with employees and reduced costs.
Collective DC (“CDC”) is a big innovation and undoubtedly getting plenty of press attention - and we’re proud of our work in this area. It gives projected DB-type outcomes with DC-type costs and removes the employer-side risks. As a consequence, we’re seeing that employers interest has been piqued into considering CDC as their future vehicle of choice. Whilst the CDC legislation in the UK is not yet in place, it’s coming soon, so watch this space. See our CDC Guide for more on what CDC has to offer.
But, CDC won’t be the right vehicle for all employers – at least not in its early forms. We have, however, worked with numerous other employers who have had the same desire to provide some form of guarantee to their employees and have helped design and implement a range of innovative solutions.
For some, this has been variable accrual rates and/or variable member contribution solutions. For others it has been a type of hybrid scheme, a fixed pension allowance (which are used to buy a variable benefit each year), or the often forgotten, and sometimes maligned, cash balance plan. And that’s just scratching the surface – we’ve worked on the whole spectrum of risk-sharing designs out there over the last few years, within little-known areas of both the DB and DC frameworks (and in the grey space between).
Who knows what the future has in store for pensions. Fifty per cent of companies replying to our recent Emerging Trends survey with open DB schemes noted they expect to make changes in the next three years. One thing I’m certain of is that the future of pensions for these companies isn’t black and white. There’s a rainbow of colour out there, and for each company there’s a DB (or DC) structure that will be exactly the right fit for them.
The difficulty is however sometimes seeing the wood for the trees and dampening out the inevitable noise surrounding pensions. Current DB costs are challengingly high and volatile for many. But that doesn’t mean a default to DC should be the solution for all. Employers shouldn’t overlook the art of the possible, and there is payback available to those who are willing to be a little more creative with their time and spend.
“Current DB costs are challengingly high and volatile for many. But that doesn’t mean a default to DC should be the solution for all.”
Mark Daniel | Head of Plan Change, GB
As a firm, we’ve been involved in over 150 UK pension change exercises over the last five years - and they’ve all been different, and rightly so. For every company and employee group is unique – and we need to stop putting them all in one of two boxes - do nothing or close.
I for one say bring on the change. For, quoting Heraclitus, “there is nothing permanent except change.”
