PLSA: The cost of inaction cannot be ignored
There are 27.3m people in the UK who are benefiting, or will benefit, from a defined benefit scheme, and these schemes are of great importance to the UK economy.
The assets of private sector DB schemes sit at around £1.5tn, and the Local Government Pension Scheme at £233bn. Together that is almost the equivalent of the UK's gross domestic product (£1.8tn).
The system is inflexible and costly. It only allows for binary outcomes of complete success or complete failure
But DB schemes are under pressure. The combination of social, political and economic issues has had a significant effect on funding levels.
The current state of DB poses a significant risk to members’ benefits for all but the most strongly funded schemes. The Pension Protection Fund helps mitigate this, but members still bear the risk the PPF does not cover.
For many members the danger is they will lose 15-20 per cent of their benefits.
Complete success or complete failure
The current system has been built up over decades and is not fit for the future. It is inflexible and costly. It only allows for binary outcomes of complete success or complete failure.
Our analysis shows that the current inefficiency of the DB sector affects not just scheme members and sponsors, but also the even greater number of people outside such schemes.
How the PLSA's taskforce wants to change DB
Video: As the PLSA has highlighted four areas for potential change to the defined benefit landscape, Ashok Gupta, who chairs its DB taskforce, talks about the proposals and the taskforce's aims.
In our research, one theme recurred constantly: the current system is too fragmented. There are more than 6,000 private sector DB schemes in the UK. Many of these are not operating at a scale to be efficient, and this creates costs for sponsors and scheme members.
The proliferation of small schemes also sets the tone for the regulatory framework, which is complex and costly. It is necessary to explore the potential of scheme consolidation to secure more economically viable schemes delivering better value to scheme members and sponsors.
We can do better for the millions of people relying on DB schemes, the businesses that support them and the economy at large. It is time to act and we encourage anyone who has an interest in DB to work with us to secure its future.
Graham Vidler is director of external affairs at the PLSA