Maggie Rodger, co-chair of the Association of Member-Nominated Trustees, highlights the effects of changes to accruals and contributions made in the wake of the financial crisis, and how these should influence surplus discussion.
We all know the price of sugar and chocolate has soared, so it’s no surprise when we find that a Mars bar costs more than we remember.
The real unwelcome discovery, however, is when we realise the bar is also significantly smaller. Yes, it tells us the weight in the small print on the wrapper, but most of us don’t read this.
This is an example of “shrinkflation”, a phenomenon that many defined benefit (DB) pensioners will become all too aware of as they receive their first pension pay slips over the next few years.
Many members will remember that, following the 2008 financial crisis, they were asked to pay higher contributions. What many forgot, or didn’t fully grasp at the time, was a concurrent change in accrual rates that took place. Like the weight of that chocolate bar, it is an important detail that can be easily overlooked, or not understood, until the point of consumption.
This situation will be facing many DB pensioners. For example, in the next few years, those finishing a 40-year career will see roughly half of their pension calculated using these reduced accrual rates. For a switch from 60ths to 80ths, the unwelcome effect revealed when the member opens their pension statement will be that, compared to when they joined the pension scheme, their payment will be around one eighth lower than they expected – and that is for the rest of their life. (For some who were moved to 120ths accrual, the loss is even more severe at one quarter.)
From deficit to surplus
Here is the twist: unlike the cost of chocolate, the cost of providing these pensions has actually dropped since those “disastrous” post-crisis recalculations. And the lower pensions now due to be paid are a significant factor in those reduced liability costs.
The actions taken – sponsors’ deficit contributions, increased member contributions, accrual changes, combined with economic hiccups along the way – mean that many schemes are now showing large surpluses and are starting to consider to whom that surplus belongs.
This question arises whether they intend to run on, or if they plan to transfer the pension to an insurer or a superfund.
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The adequacy gap
Some of the surplus will need to be earmarked to cover continuing risk, also referred to as the low dependency threshold, or the higher cost of a risk-free exit to the insurance market. This use clearly meets the best interests of both sponsor and members.
Where there is more to be shared, it is important that the discussions consider all the ways this surplus has arisen, and not just cash contributions.
This reduction in the accrual rate for members also impacts the wider discussions about pension adequacy. It is easy to see adequacy as just an issue affecting defined contribution members, where contribution levels from both member and sponsor have often been lower, reflecting the auto-enrolment minimum levels.
However, those with DB pensions who originally thought they were on track for a moderate retirement (£31,700 for a single person in the June 2025 update to Pensions UK’s Retirement Living Standards) could find themselves around £4,000 a year adrift from this. Crucially, those expecting to reach the minimum standard will be £1,700 a year short of their target for life.
The bottom line
For trustees and sponsors, these upcoming decisions on surplus sharing are critical. This is not just about managing a company’s balance sheet – this is the “Mars bar moment” for thousands of retirees.
How surplus is distributed will define the living standards of DB pensioners for decades to come. We must get this right, or even more of our friends and colleagues will be facing straitened times in their retirement. And, of course, buying fewer Mars bars – although, in the interest of balance, other chocolate snacks are also available!
Maggie Rodger is co-chair of the Association of Member-Nominated Trustees.
