There has been much talk of a pensions crisis in recent times. Most employers have closed their 'DB' (i.e. salary-related) pension schemes to new members, and many have closed the schemes to further accrual as well. There can be no doubt that some schemes face real difficulties.
There are a number of reasons. One of the main reasons is that most people are living much longer than was previously expected, which has sharply increased the cost of providing salary-related pensions. Another reason has been the volatility of investments, and the fact that long-term interest rates have been low for a long time. This pushes up the cost of providing pensions in the future. Trustees have to meet strict scheme funding requirements.
But you should not always believe employer cries of pain. Many employers took long 'contributions holidays' on the back of unsustainable stock market bubbles, when they should have been building up funds against more difficult times.
There has also been pressure from the City and investors to cut back pension benefits. Too many of them now see shutting a pension scheme as a sign of a lean and mean management prepared to take costs out of the business. Boardrooms are not just trying to deal with current problems but save money in the future. Frequently they have not only closed a salary-related scheme to new members, but cut back their contribution to the replacement 'money purchase' scheme. Employees therefore lose out twice. They now have to shoulder all the investment risk, and have less money going into their pension.
If your employer is talking of cutting back on pensions then you need to work out how much this is a real problem or a boardroom trend. After all, a cut in your future pension is little different from a cut in your wage packet. If there's a genuine problem, it's better to negotiate changes that can save a good scheme than close it altogether. Examples of this that have been agreed include:
- higher employer and employee contributions;
- a reduction in benefits, such as ending early retirement schemes or a lower accrual rate; and
- replacement of a purely salary-related scheme with a hybrid scheme that includes both salary-related and money purchase elements.
This is not to say that employer moves to reduce pensions benefits should be accepted without question, but when staff accept there is a real problem discussions should start with how to save the pension scheme instead of closing it.