Cost savings and risk avoidance can be enormous motivators in merging final salary pension plans and moving to career average earnings, but employers also need to take ethics into account says Nick Eyre, group secretary, the Co-operative Group
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A-day brought about notable changes in the pensions market. For those of us working in the Co-operative Group, that date will carry extra meaning as it was on that day that we merged our existing three group final salary pension schemes together and moved future defined benefit (DB) accrual onto re-evaluated career average earnings. All this while agreeing to preserve existing accrued benefits on a final salary basis for our members.
The Co-operative Group is the UK’s largest convenience store operator, largest funeral business and has significant businesses in travel, pharmacy and farming as well as owning The Co-operative Bank and Co-operative Insurance (CIS). Prior to 6 April this year, three principal pension schemes existed.
On an aggregate basis, we were well funded and this historic prudence meant that we were approaching this issue from a position of relative strength. Going forwards, we were alerted to the need to build on the prudent legacy we had inherited and were determined that this strength should not be wasted. While therefore not immune from the social, demographic and economic factors facing all major pension schemes, we realised that by acting now we would be better placed to deliver a long-term sustainable solution that met the needs of all our stakeholders
We established a working party to analyse how we should address pension provision across the Co-operative Group, balancing the need to reduce the unacceptable cost and risk to the Group, its members (our owners) and its 70,000 employees.
The first conclusion the review established was that any plan design should be affordable on a “best liability matching” basis and was not dependent on the (uncertain) continued out-performance of the equity markets. The increased costs and financial, legal, and governance risks of running three separate schemes led to the conclusion that a merger was highly desirable, along with the potential benefits for HR. Our risk-averse approach pushed us to at least consider a defined contribution (DC) solution in which we would be committing a finite cost.
This would give cost certainty to the employer, and transfer almost all risk to staff who would bear the mortality and investment risk. When making a final decision we were uncomfortable, however, in providing differing pensions provision for seasoned and new employees, or indeed for senior executives and other staff. This, to us, appeared to be potentially divisive within the workforce and did not sit comfortably with our inherent co-operative values, principles and ethics. It is also likely to give rise to potential discrimination action down the road.
Throughout the process, we never forgot how important a benefit this was for our staff. As such, we were also very uncomfortable offloading the risks described previously onto our employee stakeholders, who are not equipped to adequately address them.
So DC plans were ruled out and a DB solution for all had to be found. In pulling all this reasoning together, our conclusions were that our DB scheme should be based on career average earnings rather than final salary, but that existing accrued final salary benefits would be preserved. This is fundamentally a fairer basis on which to base DB pension provision. This solution created the right balance.
It did reduce employer risks but we didn’t transfer all the risks over to our staff. As the person ultimately responsible for this project, I now take a lot of comfort in that, and feel that we did make the right call in pursuing the option we did.
When the dust settles on pensions in a few years time, it will be interesting to see just how many UK employers can claim that all their employees have continued access to some form of DB pension.