Intergenerational fairness? Don't forget final salary pension schemes

 

JBS 2

Talk to John:

john.broomesaunders@broadstone.co.uk

020 7893 3441

It was announced recently that the Commons Work and Pensions Committee is going to examine whether Government policies are contributing to intergenerational unfairness. This reflects the growing view from economists and academics that current pensioners are, in general, rather better off than younger workers. 

A significant driver of this inequality is undoubtedly the former existence (and subsequent demise) of final salary pension schemes. Many current pensioners will now be reaping the rewards of historic membership of a final salary scheme, and will be enjoying a pension that is materially more valuable than they would have originally anticipated. By contrast, employers who have had their fingers burnt by these same final salary schemes have generally responded by switching to less generous defined contribution schemes for current employees. To get the full picture, it will be important for the committee to consider not only the current circumstances of younger workers, but also their future prospects. If their pension provision is no more than meagre auto-enrolment minimum contributions into a defined contribution arrangements, their prospects for a prosperous retirement may be pretty grim. 

Even when employers start to struggle to fund their generous final salary pension schemes, the odds are still stacked in favour of pensioners. The Pension Protection Fund, the lifeboat arrangement that picks up the pieces if an employer goes bust, is skewed in favour of pensioners. Younger members will get a significant reduction to the value of their pension if it gets taken over by the PPF, whereas pensioners get something close to a 100% guarantee. 

Even before the PPF get involved, schemes still have a tendency to prioritise current pensioners. Even if a scheme has a stonking big deficit that might never be filled, pensioners will almost always continue to receive their full entitlement. Meanwhile, it is the younger members who bear the biggest risks – every pound paid out of an underfunded scheme means that the security of remaining members is further jeopardised. The governance of such schemes is also skewed in favour of pensioners, who by law must be involved in selecting some of the scheme’s trustees; by contrast, many younger scheme members will have no say in how the scheme is run. 

The Government has spent the last 10 years or so building up a chunky framework for ensuring that final salary pensions are protected; perhaps this is a good opportunity to examine whether that protection is applied fairly across the generations.

 

John Broome Saunders

Acturial Director