The other pensions problem

The man on the street might now be reasonably expected to have some grasp of the challenges posed by defined benefit pension schemes, or at least be aware that a challenge exists.

Companies might therefore believe that by opting for defined contribution arrangements they can insulate themselves from risk, as their obligation to the worker lasts broadly as long as they are employing them, rather than the rest of their lives as is the case in DB.

But is this really the case? As this week’s edition of our Any Other Business feature points out, DC savers with low contributions could struggle to afford retirement – and those who cannot afford to retire will keep working. This may have dangerous consequences for companies, which could find themselves with no way of retiring their ageing workforces to make space for fresh talent.

With auto-enrolment contribution rates still at 1 per cent each for employer and employee, and longevity steadily increasing, the challenges faced by DC savers have been well documented. Last year, the OECD warned that without voluntary pension income such as a workplace or personal pension, the average replacement rate for the UK drops to just 38 per cent of pre-retirement income.

This research, like much of the other work on this issue, does a good job of illustrating the risks both for individuals and the UK as a whole. The group that remains unaddressed are the companies that actually set and pay the matched contributions that are so crucial to an adequate retirement income.

As any actuary will tell you, the liabilities of DB schemes are hard enough to value and predict. Trying to do the same for DC liabilities would surely be harder still, especially considering increasing workforce mobility and the different forms of wealth individuals may hold, but if companies are to take action to improve DC adequacy, it might help to explain the need in terms they know and fear.