For Immediate Release, Thursday, 22nd December
Think tank finds that if between 2000 and 2015 the money that was used to plug private defined benefit pension deficits had instead been redirected towards wages, average salaries would be £1,473 higher.
‘The End of the Beginning? Private defined benefit pensions and the new normal’, a report by the International Longevity Centre – UK (ILC-UK) to be published in January also reveals:
- Since the year 2000, pension contributions have accounted for an increasingly large proportion of total employee compensation. Where wages once accounted for more than 87% of total compensation, they now account for around 83%.
- While some of those pension contributions will be for current employees, and therefore represents deferred consumption, around half has been for servicing the deficits of DB pensions which have since closed to new members.
- The number of retirees receiving a DB pension will remain in the millions well into the latter half of this century – 3 million by 2060 and 1 million by 2070.
The collapse of BHS and concerns over the future of Tata Steel have put the sustainability of private sector defined benefit (DB) pension schemes firmly into the spotlight. These types of DB schemes promise a set payment to their members in retirement based on salary and years of service, but there are growing concerns that many such schemes and their sponsors will be unable to fulfil their promises at a time of rising life expectancy and falling interest rates.
Through new analysis of the Office for National Statistics’ National Accounts, the report finds that if the resources used to plug rising DB deficits had been directed towards boosting the pay of current workers, wages may have been, on average, as much as 6% higher (£1,473) in 2015.
While around half of all DB schemes are now closed to new members, the number of retirees receiving a DB pension will remain in the millions well into the latter half of this century – 3 million by 2060 and 1 million by 2070.
Source: Author’s calculations based on ONS National Accounts
‘The End of the Beginning? Private defined benefit pensions and the new normal’, supported by Ince and Co LLP and to be published by the ILC-UK in January will examine the scale of the DB pensions’ challenge, outlining what its implications have been for firms and employees, and how economic and demographic trends could shape the its future.
The report will make a series of policy recommendations to help ensure the long-term sustainability of both DB schemes, and the companies and employees funding them.
Ben Franklin, Head of Economics of Ageing, ILC-UK said:
While the vast majority of private sector DB schemes have closed to new members or future accrual, their impact on individuals, firms and the economy as a whole is likely to be long felt. Our analysis suggests that plugging pension deficits has acted as an opportunity cost – supporting the pensions of retirees at the cost of investing in the current workforce. This situation will not change overnight. Based on conservative assumptions about future life expectancy and mortality, we estimate that DB pensions will continue to be paid out well into the latter half of this century.
We call on government, regulators and industry to devise solutions that move away from simply securing full member benefits and towards those that build in a recognition for the wider societal and economic challenges associated with continued DB pension deficits.
Jennifer Donohue, Head of Global Corporate and Transactional Insurance, Ince and Co LLP said:
Company executives, pension trustees and all DB stakeholders need to adapt to a society where funds of DB schemes cannot provide for forty or fifty years of retirement. Recognition of this legacy issue, and finding solutions to it, is the responsibility of all stakeholders, corporates, the government and scientists as we face a United Kingdom where a third of all babies born three years ago are now predicted to live to a hundred years old.
There is a nascent market of “gifted structurers” who can provide short, medium and long term (some as long as sixty years) solutions to the deficits problem. These solutions need to be accepted, expanded and developed if a societal calamity is to be avoided.
‘The End of the Beginning? Private defined benefit pensions and the new normal’ will be launched on Wednesday, 18th January with a panel debate of pensions policy experts. If you are interested in attending, please contact Dave Eaton at email@example.com.
Dave Eaton (firstname.lastname@example.org on 07531 164 886)
The International Longevity Centre – UK (ILC-UK) is a futures organisation focussed on some of the biggest challenges facing Government and society in the context of demographic change.
We ask difficult questions and present new solutions to the challenges and opportunities of ageing. We undertake research and policy analysis and create a forum for debate and action.
Our policy remit is broad, and covers everything from pensions and financial planning, to health and social care, housing design, and age discrimination. We work primarily with central government, but also actively build relationships with local government, the private sector and relevant professional and academic associations.
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