Tim Pike: Could we see a return to defined benefit pensions?

The UK’s private sector defined benefit (DB) pension landscape is generally described as in its endgame. There has been a fall in the number of open DB pension schemes as a result of economic, social and regulatory changes.

The vast majority of employers offer a defined contribution (DC) pension to eligible employees. An increase in the number of DB pension schemes would require a shift from employers offering DC pension schemes and overcoming several obstacles. Employers have come to offer DC pensions from one of two routes.

Firstly, employers that switched from offering DB to DC pensions may find it challenging to row back upon such a profound shift. Their experience of DB pensions was presumably imperfect, potentially needing to fund deficit payments, and they will naturally be cautious.

Secondly, employers that have only ever offered a DC scheme will typically not be making the scale of contributions commensurate with funding DB accrual rates. For these employers to switch would require an increase to payroll cost that may be of the order of 20%. Many employers would struggle to commit to such increased costs.

There is a potential third way. Multi-employer collective defined contribution (CDC) pension schemes may be on the horizon. While CDC schemes do not guarantee their benefits, they could enable employers to offer a DB-style pension without a future liability and at a contribution rate of their choice, albeit with a benefit level that will reflect this. As a new offering, these will require support from multiple stakeholders to gain a toe-hold in the workplace pension provision landscape.

Ultimately, if members wish to receive a pension of the magnitude traditionally associated with DB provision then it will require a DB scale of contribution to afford that level of benefit, regardless of the nature of the scheme.

Tim Pike is head of modelling at the Pensions Policy Institute (PPI).