Railpen’s Tim Miller says the resilience of open defined benefit schemes shows that they need to be a part of the Pensions Commission’s thinking on retirement income adequacy, in the latest open letter in our series.
Dear Pensions Commission…
The Government’s July 2025 announcement to relaunch the Pensions Commission offers the UK a rare and much-needed opportunity to re-evaluate how it delivers retirement security.
The original Turner Commission in 2005 charted the early years of decline in private sector defined benefit (DB) pension provision, and the UK’s transition to largely inferior defined contribution (DC) pension offerings. Two decades on, and the DB schemes of 2005 have continued to face significant economic and regulatory headwinds.
However, thanks to the resolve of trustees, advisers, and employers, DB remains a vital component in the UK’s pensions adequacy mission, with nearly three quarters of a million private sector employees continuing to accrue DB benefits in schemes that are open to new entrants.
These schemes must be cherished and protected for future generations if adequacy is ever to move in the right direction.
The great pension risk transfer
The UK pension system has undergone a seismic transformation from DB to DC pension provision. While the original commission can be praised for kick-starting auto-enrolment and its successful expansion of private pension participation, it also entrenched a shift towards a pension framework that has prioritised coverage over quality.
Back when auto-enrolment was first introduced in 2012, there were nearly twice as many active members in private sector DB schemes as there were in private sector DC schemes. Roll forward to the present day, and there are now over 172 times more active members in DC schemes compared to DB.
I’m fortunate to count myself in a minority to have travelled in the opposite direction. Having spent the first 10 years of my career paying auto-enrolment minimum contributions into my former pensions consultancy employer’s DC plan, I’m now an active member in one of the UK’s largest remaining open DB schemes – the Railways Pension Scheme.
The flaws in today’s concept of a DC pension are well-known – pension-specific understanding is weak, with many members unaware of their pot size or how to convert savings into reliable retirement income. Individuals are ill-equipped to navigate the incredibly complex investment and longevity risks that rest on their shoulders, and even engaged employees and employers simply aren’t contributing enough – a certain young actuary included!
The sad result is that the Pensions Policy Institute (PPI) predicts that over 90% of DC-only savers are on track for an inadequate income in retirement. Pensions UK (formerly the PLSA) similarly warns that more than half of savers will fall short of the retirement targets set by the 2005 commission without further reform.
A sense of realism is required, but any uptick in contributions is unlikely to be welcomed by employers or employees in the current economic environment. The commission has a very tricky job on its hands.
DB’s resilience in the face of many challenges
The unfortunate decline in the prevalence of DB provision is the result of an accumulation of a number of factors. In particular, key changes in pensions and accounting rules have placed ever more onerous funding requirements on sponsoring employers and ever more prescription and governance on trustees.
“If a scheme remains open today, it’s not here by chance. Ultimately, the trustees, advisers, and the sponsor have been prepared to continually persevere against the regulatory tide.”
Tim Miller, Railpen
To put it plainly, the job of the trustee of an open scheme has been an incredibly difficult one. As a case in point, my first few years supporting the railways pension schemes have been dominated by the hugely important work our trustee has had to carry out with government and other stakeholders to ensure that the new DB funding and investment regime works in the best interests of open schemes – yet another regulatory development that placed DB’s future in jeopardy if unchallenged.
If a scheme remains open today, it’s not here by chance. Ultimately, the trustees, advisers, and the sponsor have been prepared to continually persevere against the regulatory tide. Notably, these schemes tend to be some of the largest in the UK, serving critical sectors such as transport and education, where the quality of DB provision is of strategic importance from an employee retention perspective.
A sustainable future for DB
With more than 100,000 active members in 2024, active membership in the Railways Pension Scheme has actually grown by almost 10% since the original Pension Commission in 2005. Many elements of the scheme remain open to new entrants and are sustained through shared contributions, with members contributing an average of 8% of salary, more than double the minimum required under auto-enrolment. The average pension paid per week is a modest £180, which reflects prudent, long-term saving and investment.
DB’s importance also extends beyond pensions adequacy. It’s about the national interest.
Railpen, the investment manager for the Railways Pension Scheme, oversees more than £34bn in assets, with over one third invested in the UK. This long-term, patient capital supports infrastructure, innovation, and growth projects that align with the government’s broader economic objectives.
While regulatory challenges are never far away, there are positive steps forward in recent policy which are to be welcomed. These include proposed amendments to the Pensions Act 2004 that should enable the Pension Protection Fund to charge a zero levy, a sensible U-turn on proposed inheritance tax charges on death-in-service lump sums, and the finalisation of a new DB funding and investment regime that recognises the important and unique characteristics of open DB schemes.
The limited scope of the new Pensions Commission is likely to focus (quite rightly) on the state pension and improving the lives of today’s and tomorrow’s DC savers, but it must do so by building on the solid foundations that the Railways Pension Scheme and other DB schemes still provide.
As it did in 2005, DB and its many iterations remain a benchmark of pension provision for the Pensions Commission to aspire to, and one of its key recommendations must be to ensure that the UK’s remaining open DB schemes are protected for future generations.
Tim Miller is senior manager for pensions policy at Railpen.
