Time to address DB’s drag on DC, consultant urges

Servicing legacy defined benefit (DB) pension schemes is a “drag” on employers’ ability to provide adequate defined contribution (DC) offerings, according to JLT Employee Benefits.

John Wilson, head of technical at JLT Employee Benefits, said at a press briefing this morning that the increasing cost of DB provision was affecting corporate decisions over wages and DC pension contributions.

“It’s something we can’t bury our heads in the sand about any more,” Wilson said. “People have to wake up to the fact of just how expensive retirement is.”

Wilson added that some new members of DC schemes were being enrolled with “woefully inadequate” contribution levels – “sometimes as low as 1% of pay from the employer”.

“Part of the reason for that is that employers have finite resources, and so much of those resources are being diverted to try and tackle the DB deficits,” he said.

JLT Employee Benefits today published research into the state of the UK’s DB market, claiming that sponsors could save up to £500m (€580m) a year through consolidating small pension schemes.

Simplifying benefit structures would also reduce costs, said Wilson, allowing easier consolidation. Even small UK DB pension funds can have multiple tranches of benefits relating to when scheme or national rules were amended.

The UK government attempted to simplify its pension-related legislation in 2006, but with little success. Wilson, however, said JLT’s proposals would require very little change to existing rules.

“What we’re suggesting is actually making changes to scheme benefits,” he explained. “The only changes we’d be looking for in legislation would be ensuring it was not putting in any obstacles to simplifying scheme benefits in a streamlined way.”

JLT has presented its report – entitled “How do we get out of this pensions black hole?” – to regulators and government.

UK pensions minister Richard Harrington is expected to present a consultation on DB sector reform in the coming weeks, taking into account industry ideas and a wide-ranging report from the Work and Pensions Committee published late last year.