News Analysis: The closure of defined benefit pension schemes may alleviate a significant financial burden, but experts have urged employers to think carefully about the long-term impact of the replacement arrangements chosen for affected employees.
This week supermarket giant Tesco wrote to employees with details of the defined contribution arrangement due to replace the company’s DB pension scheme.
From November Tesco will match employee contributions of up to 7.5 per cent of pensionable salary in a newly established DC scheme – a 50 per cent increase from the 5 per cent matching terms proposed pre-consultation.
The new scheme will also offer life cover of five times salary, an increase from the four times salary initially offered.
A Tesco spokesperson said: “Thousands of colleagues engaged in our pension consultation and we’ve listened carefully to feedback from them and their unions as part of our decision-making process.
“Whilst we’ve taken the difficult decision to close our existing scheme, we’ve acted on this feedback and significantly improved the original proposal.
Every action has an equal and opposite reaction – if you do have people on different pay in fundamentally the same roles you’re storing up some issues
Darren Redmayne, Lincoln Pensions
“We’re committed to providing a competitive pension scheme that’s sustainable for the business and rewards our 300,000 colleagues for the great job they do.”
Uniform benefits
Tesco’s new DC arrangement will provide uniform benefits to employees from its November start date. However, problems could arise in cases where DB schemes have been closed to new joiners for a number of years already, and companies have a pre-existing DC arrangement.
In these scenarios, enhanced DC offerings for ex-DB members can create a two-tiered DC regime.
Gurmukh Hayre, head of DC solutions at consultancy KPMG, said it was not uncommon for employers to run a two-tier DC structure.
“A lot of employers do look at contributions and say, ‘Okay, perhaps we’ll give you a higher contribution to reflect the fact you had a different benefit in the past’. But they’ve obviously got to trade that off against their duties as an employer to work towards a harmonisation across the board,” he said.
“There’s sometimes a bit of a contradiction when companies try and achieve harmonisation but still recognise that some people in the past had a different benefit.”
Andrew Vaughan, partner at consultancy Barnett Waddingham, said companies should be thinking about aligning benefits regardless of whether employees began their accrual in DB or have always been in the DC environment.
“The ultimate goal must be to have one level of appropriate DC across the whole workforce,” he said.
The ultimate goal must be to have one level of appropriate DC across the whole workforce
Andrew Vaughan, Barnett Waddingham
Darren Redmayne, managing director of covenant specialist Lincoln Pensions, said a more straightforward singular approach would lead to better employee engagement, and avoid issues arising between generations of staff.
“Every action has an equal and opposite reaction – if you do have people on different pay in fundamentally the same roles you’re storing up some issues,” said Redmayne.
He added there would need to be harmonisation over time to avoid the risk of “industrial action-type” issues.
Driving on with DB
While Tesco exited the DB arena, Tata Steel announced in July that its scheme would remain open after agreeing a proposal with unions.
Industrial action has been at the centre of ongoing discussion between Tata Steel and its workforce following the company’s announcement of plans to close the British Steel Pension Scheme to future accrual back in March.
Tata workers turned out en masse to vote in favour of strike action in June after negotiations on the planned closure broke down.
Existing members of Tata’s final salary scheme will continue to accrue future service benefits with a number of modifications. Changes will include a 1.75 per cent cap on pensionable earnings. Any growth above the cap will be pensionable on a DC basis.
In July a spokesperson from Tata Steel said: “The new arrangements, including the modifications to scheme benefits, will address a significant proportion of the pension scheme’s projected deficit.”
Redmayne said that where industrial action is involved, the risk of value destruction is significant.
“The cost balance of executing closure of the scheme isn’t seen to be worth following through,” he said. “But I don’t think that’s the end of the story.”
