Collective schemes pose threat to final salary pensions

Hundreds of thousands of workers with “gold standard” pensions face a new threat to their retirement benefits as major employers eye moving them to less secure collective schemes.

Guy Opperman, pensions minister, has confirmed that large companies, still running traditional “final salary” pension plans that offer workers a secure retirement income, have shown interest in downgrading staff to newer collective defined contribution (CDC) arrangements, which leave members with less peace of mind when it comes to their retirement income.

The number of members still building benefits in defined benefit schemes has halved from 2.4m in 2010 to 1.2m in 2018, as employers close plans they say are no longer affordable.

Instead, companies have tipped staff into “defined contribution” plans which are less expensive for them to run, but load all the investment risk for the pension on to the member.

This week the government introduced plans for new collective defined contribution (CDC) schemes currently unavailable in the UK. Under a CDC scheme, workers pool their pensions into one fund which manages investment and longevity risk on their behalf. Adherents of CDCs say they offer the potential for better retirement returns than saving into individual defined contribution accounts.

But members of defined benefit schemes moved into CDC nonetheless face a downgrade of their benefits.

Mr Opperman said the only employers which had spoken to him about setting up CDC plans were those still running better-quality defined benefit plans.

“It is the traditional DB who have expressed the most interest so far [in CDC],” Mr Opperman told the Financial Times. “I don’t believe DC schemes have come to see me.”

The minister said there were “definitely substantial employers” with historic defined benefit schemes which “want to find a way forward” and could work with unions and employees to find alternative ways to provide long-term sustainable pensions.

His comments came as Royal Mail, which has 160,000 employees, and the Communication Workers Union agreed to set up a CDC scheme for members. The CDC will be an upgrade for members currently saving into a defined contribution plan following the closure of their defined benefit scheme.

“The CWU are clearly a very progressive union who really embrace problems and say ‘how can we solve them’,” Mr Opperman said.

Royal Mail is facing a strike threat at Christmas after union members voted to back industrial action in a dispute over conditions and job security. However, Terry Pullinger, general secretary of the CWU, said the pension agreement was unaffected by the industrial dispute.

Jack Dromey, shadow pensions minister, supported the introduction of CDC for Royal Mail but said he was clear “there can be no question of CDC being used to undermine DB schemes”.

“Welcome assurances have been given by the government and we will ensure that an unmistakable message is sent that the purpose of CDC is to provide an outcome significantly better than DC schemes but not at the expense of DB,” said Mr Dromey.

Meanwhile, millions saving for retirement in the UK will for the first time be able to see all their pension pots in one online hub, under separate measures introduced this week.

Proposals for a so-called “pensions dashboard”, which will allow people to view their individual pension account on smartphones, were included in the Queen’s Speech, which sets the government’s legislative agenda.

Plans for a pensions dashboard were first announced in 2016, but disagreement in the industry over the design of the project and how it would be regulated were among the issues that have delayed its introduction.

There are currently about 44,000 pension schemes in the UK with about 22m savers holding private pensions. The dashboard will include all types of pension schemes, including public sector and private arrangements.

Under the government’s plans, the pensions industry, as well as the government-backed Money and Pensions Service, will be able to offer their own pension dashboards to the public.

“Although pension providers will be permitted to launch their own dashboards in addition to the one established by the new guidance body — the Money and Pensions Service — individuals are more likely to trust a government-funded dashboard than one offered by a pension provider, citing concerns about the safety of their data and whether it would be used as a means to sell the providers’ own products,” said James Jones-Tinsley, self-invested technical specialist at Barnett Waddingham, an actuarial consultancy.

The government said that legislation for pensions dashboards would be introduced at the “earliest opportunity”. But industry experts said savers should not expect to log on to a dashboard soon.

“The launch of a public dashboard with anything like widespread coverage will probably be a couple of years,” said Tom McPhail, head of policy with Hargreaves Lansdown, the investment manager. “Even then it won’t be universal coverage and it will be basic data.”

Stronger powers for the pensions regulator to deter and punish company bosses who wilfully or recklessly flouted their pension scheme duties were also set out in the Queen’s Speech.

“While most pension schemes are well-run and managed, high-profile cases like Carillion and BHS damage confidence in the pensions system,” said Nigel Peaple, director of policy with the Pensions and Lifetime Savings Association, the trade body for workplace pension schemes.

“We support new powers for the Pensions Regulator to take action sooner, impose significant fines, and have more oversight of risky corporate transactions in order to prevent reckless behaviour and protect savers’ hard-earned money.”

The government said it intended to legislate for measures introduced in the Queen’s Speech at the “earliest opportunity”.