Excitement is building over collective DC and the traditional DC market is facing significant change, but we mustn’t forget about defined benefit, says Nick Reeve.
A common theme of pensions commentary for much of my career has been the ‘death of defined benefit’. Scheme closures and the growth of the bulk annuity market have meant a steady decline in DB provision and the number of such schemes.
Data from the Pension Protection Fund (PPF) confirms this: just 4% of private sector DB schemes are still accepting new members, compared to 43% two decades ago. More than three-quarters (78%) are either closed to new accrual or are winding up, according to the PPF’s latest Purple Book dataset.
The future of pension provision is, undoubtedly, defined contribution (and collective DC, probably to a lesser extent).
But this misses an important nuance and an approaching problem that the UK pensions sector will have to address.
DB liabilities will pay out over decades, even for closed schemes. Take the Tesco Pension Fund, which currently has liabilities of almost £12bn according to the supermarket giant’s latest annual report. The report states that “around 34%” of the scheme’s benefits are expected to be paid out “beyond 30 years’ time, with the last payments expected to be over 80 years from now”.
This means that those entrusted with looking after the final payments from some DB schemes haven’t been born yet. And therein lies an important issue: who will be the trustees of those super-mature schemes?
For many, the responsibility will fall to an insurance company. Already, £500bn worth of DB pension assets have transferred to insurers through bulk annuity transactions, so perhaps those final payments from the Tesco scheme will instead be made through annuities managed by a different entity entirely. (Perhaps that future annuity provider doesn’t exist yet!)
However, for the next couple of decades at least (or maybe longer for those aiming to ‘run on’), many DB schemes will continue to operate – investing money, paying benefits, and looking after their members. Almost 40% of DB members are either in open schemes or those that are still accepting fresh accrual, according to the PPF. This means these schemes cannot be dismissed by the pensions industry as yesterday’s news.
Back to the trustee question. The Pensions Management Institute recently launched an expanded Trustee Accelerator Programme in partnership with several DC master trusts, so perhaps the next stage needs to be a similar programme for DB schemes. It may be more difficult to attract new faces, given that few young people in the private sector will have a DB pension, but perhaps some can be persuaded to help oversee their parents’ or grandparents’ retirement savings.
Nick Reeve is editor of Pensions Expert.
