On the go: Analysis by the Pensions Policy Institute, sponsored by the Trades Union Congress, has shown that the pressures of the coronavirus pandemic have accelerated the rate of defined benefit scheme closures, but member outcomes are far less reliable in defined contribution schemes.
Prior to Covid-19, the PPI estimated that the number of DB schemes open to new members could drop from more than 3,000 in 2018 to fewer than 850 by 2030.
The pandemic, though, brought new pressures impacting on the desirability of providing open DB pensions in the private sector, the PPI said.
In particular, the crisis has adversely affected sponsor covenants and schemes’ balance of assets and liabilities.
“There has been anecdotal evidence that private sector employers may have been closing the DB pension schemes and replacing them with a DC pension scheme to reduce the liability to the employer,” the PPI report stated.
This has knock-on effects on the members’ security in retirement, because its findings show that “certainty of income in retirement is attained through the state pension and DB pension scheme membership”, while “the variation in outcomes as a result of an individual bearing investment risk in a DC pension scheme leads to a far wider spread of outcomes”, it continued.
“A DC scheme can produce higher income in retirement. However, this is associated with an increase in downside risk, meaning that poorer outcomes are more likely in a DC scheme than in a DB scheme.”
Women are especially disadvantaged even in DB schemes, because part-time working is more common among women in routine and semi-routine occupations, meaning women have comparably depressed pay and lower lifetime earnings, which translates into greater reliance on state pension provision, the PPI report explained.
“The state pension provides an underpin to retirement income that is predictable and assured. Low lifetime earnings will result in state pension entitlement savings making up a greater proportion of income in retirement,” it added.
“Long-term DB pension scheme membership will produce a more predictable retirement income as the investment risk is not borne by the member. This investment risk produces less predictable outcomes when private pension saving is based around DC membership.”
