The Department of Work & Pensions (DWP) Green Paper proposing allowing ‘stressed employers’ with DB schemes to change their reference point for indexation reflects short-term thinking where it should present an opportunity for longer-term planning, according to Ros Altmann.
The former pensions minister said the government must put plans in place to manage the run-off of defined benefit (DB) pension schemes, pointing out the vast majority of such schemes are now closed to new members and, once closed, are “effectively in run-off”.
Altmann (pictured) added: “If we wind forward a few years, it is clear that fewer and fewer workers will actually be in these pensions schemes and employers will be sitting on a legacy liability that has nothing to do with their business at all – they will have little or no business interest in supporting the scheme, and this will entail greater risks to the Pension Protection Fund.
“Any period of economic weakness is bound to lead to greater sponsor insolvency and we should be planning for such problems now.”
Altmann also highlighted the potentially damaging impact ongoing DB pension schemes may have on younger workers’ pensions and job prospects.
“The Green Paper suggests the cost of pension accrual for a typical UK DB scheme has risen from around 24% of salary in 2009 to around 50% in 2016,” she explained. “Average contributions to direct contribution (DC) schemes are nowhere near these levels.
“The greater the cost of supporting the legacy DB schemes, the lower the resource potentially available to pay into younger, newer workers’ DC schemes.”
Consolidation proposalsOn the positive side, Altmann agreed the consolidation proposals suggested in the paper were a good idea, explaining they could cut costs and enhance potential benefits. She also felt that broader asset allocation strategies from DB schemes, as mentioned in the Green Paper, was an important point to address.
“The paper will generate useful debate, but the need for action is greater than suggested by it,” she concluded.
“Many employers are struggling with DB scheme costs and, as we leave the EU, British businesses will have many other issues to deal with. A system that helps them manage legacy liabilities is needed for the coming years.”
The post Ros Altmann labels DWP’s DB Green Paper ‘short-sighted’ appeared first on Retirement Planner.