The sad decline of workplace pensions

Defined benefit (DB) (also known as final salary) pension schemes, which provide a guaranteed, inflation-linked income for life that’s linked to your salary and length of service, used to be the norm in the private sector. They were so expensive to run that they have all but disappeared — and so have the generous employer contributions that went with them.” Joanna Noble on The Times today

The best way to see a DB scheme was that it was deferred salary. Employees forwent some of their income in order to build pension rights for the future. They were not especially “expensive to run” and those costs were paid for not by the employer anyway, but out of the Assets of the ring-fenced Pension Fund.

The switch to Defined Contribution (DC) was primarily driven by Employers’ wish to reduce their funding of pensions. In fact the quantum of those contributions was a relatively modest cost burden for a well run and profitable company. And ironically, as companies moved away from proper pension funding for all, they started paying their directors and senior executives astronomically higher remuneration. One law for the rich…!

Most auto-enrolment is linked to a DC scheme and in truth these vehicles are not pension schemes at all. They are savings schemes which for the retiree offer benefits which are orders of magnitude less beneficial than the DB scheme they replaced. Private Sector employees could not organise to fight the decline of DB. Unlike in the Public Sector where a form of DB is still the norm thanks to the Unions!

The decline of decent retirement pensions in the private sector is one of the scandals of modern times and successive governments did nothing to stop it. Today’s Private Sector employees can work for forty years or more with no guarantees as to what their DC scheme will give them. That will depend on the buoyancy of the scheme’s investments on the date of their retirement.