Ruth Bamforth at Walker Morris looks at corporate attitudes to pensions and the many ways in which pension provision differs depending on sectors, affordability and regulation.
Key points
Cost and keeping in line with market practice are some of the main reasons cited for scheme closure
Automatic enrolment has cemented the position of DC schemes
Care schemes are flourishing in the public sector
The first question to ask is, how old is the employer? The longer the employer has been established, the greater the likelihood that there will be a final salary pension scheme. This is particularly true within certain sectors such as manufacturing.
Of course, this in itself does not mean that the employer will still be providing a final salary scheme for current employees. Research published by the Pensions Regulator in November 2016 found that only 15 per cent of final salary schemes are open to new members.
Care schemes seem to sit in a twilight world between final salary and DC schemes
Employers close schemes for cost reasons
Employers often cite cost as the reason for closing their final salary schemes to new members and future accrual. As more employers have closed their schemes, an additional reason given for closure is to ensure that pension benefits are in step with market practice.
Scheme closure may cap future service expenses, but an employer still has the cost and responsibility of maintaining a pension fund, which, as time passes, becomes increasingly disconnected from its current workforce.
Some employers still have open final salary schemes, and many of these are in the education and not-for-profit sectors. Other employers with open final salary schemes include those in the public sector outsourcing industry.
Historically, such employers were unable to participate in unfunded public sector pension schemes such as the NHS Pension Scheme and so provided a 'broadly comparable' scheme. A broadly comparable scheme is a private sector scheme that provides benefits which are certified to be broadly no less favourable than the appropriate public sector scheme.
The introduction of New Fair Deal in 2013, the government's pensions outsourcing guidance, which allows contractors to participate in all public sector schemes funded and unfunded, is likely to lead to the demise of broadly comparable schemes for future accrual.
Moving to Care
DC schemes shift investment risk to the member and, as such, are far more economic for employers to run. Before the introduction of automatic enrolment with effect from October 2012, DC schemes were the most popular replacement for final salary schemes. Automatic-enrolment has seemingly cemented the position of DC schemes even though it is possible to use a final salary scheme for auto-enrolment compliance.
Career average revalued earnings schemes, widely known as Care schemes, seem to sit in a twilight world between final salary and DC schemes. Some employers provide Care benefits in order to maintain defined benefit pension provision, but there is also evidence that Care schemes have also been shut to accrual to save money.
JLR meets members halfway with Care switch
Jaguar Land Rover has decided to switch its defined benefit schemes from final salary to a career average revalued earnings structure, as companies look to cut costs and manage risk while keeping employees on board.
Care schemes flourish in the public sector; indeed, the latest round of change to public sector schemes, kick-started by the 2011 Hutton report, saw most public sector schemes move from final salary to Care. Outsourcing employers who participate in public sector schemes as a result of New Fair Deal will be providing Care benefits for outsourced employees.
It is virtually impossible to generalise about pension provision from a corporate perspective. For some employers, often the more paternalistic, pensions may be seen as a retention tool and an important employee benefit to be valued.
In contrast, other employers may simply wish to provide the automatic enrolment minimum. The cost of legacy final salary pension arrangements can cause issues to otherwise successful employers or indeed put employers without such legacy schemes at a competitive advantage.
At the same time, the impact of pensions regulation has had a significant impact on the type of pension schemes provided to employees. The proliferation of pensions legislation seems never-ending.
Whatever type of scheme provided, the ever-changing rules around pensions do not help companies provide adequate pension saving schemes for employees.
Ruth Bamforth is a director at law firm Walker Morris
