Around 5,000 of the 6,000 defined benefit (DB) pension schemes in the UK are in deficit – and the Pensions and Lifetime Savings Association (PLSA) is calling for DB scheme providers to take urgent action.
In total, DB schemes hold £1.5 trillion (€1.7 trillion) and pay out £81 billion every year in salary-related pension benefits. However, Ashok Gupta, chair of the PLSA’s DB taskforce, said members’ benefits were at risk in all but the most strongly funded schemes.
He added that while the Pension Protection Fund helped mitigate risks in providing security for scheme members whose schemes have failed, the PPF does not cover all risks, and many members could lose 15-20% of their benefits.
Moreover, DB deficits are wasteful for businesses, in 2015, according to data from the Office for National Statistics, employers paid approximately £31 billion into DB schemes, £11 billion of which was deficit recovery contributions. This money, Gupta said, could have been spent on wages, investment, dividends or contributions to defined contribution schemes.
As a result, the PLSA has published a comprehensive action plan for dealing with the issue. Key suggestions include: scheme consolidation, which could help secure more economically viable schemes better able to deliver value to scheme members and their sponsors; removing regulation that adds cost and has little or no tangible benefit; redesigning schemes to improve flexibility, and developing better measures of benefit risk.
Joanne Segars, chief executive of the PLSA, said the system was “not working as well as it could”, was “inflexible and costly”, only allowing “for binary outcomes of complete success or complete failure”.
“The next phase will be to collaborate across the pensions and investment sector with government, regulators, social partners and industry to develop solutions and recommendations to support the sustainability of DB,” she added.
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