UK pensions - the changing landscape - Business Works
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UK pensions - the changing landscape

Wayne Daniel, CEO, MetLife Assurance Pensions should be a topic of great interest to us all. The pensions landscape in the UK has changed dramatically in the past couple of decades and more changes are to come. It is important that we are all aware of the implications to our staff and ourselves. New research in the UK shows that defined benefit (DB) pensions have been in decline in the private sector since the late 1960s. The costs and risks of offering a defined benefit pension scheme have increased substantially due to a combination of factors, including increased longevity and changes to regulation and legislation.

A research report, The changing landscape of pension schemes in the private sector in the UK (PDF) by The Pensions Policy Institute (PPI), has been sponsored by MetLife Assurance. It shows that, out of around 9.5 million active members of private sector workplace pension schemes, only 1.6 million are accruing new defined benefits and this is projected to fall to less than 1 million by 2020 as the decline of defined benefit (DB) schemes accelerates.

The cost of funding a DB pension has risen from 11% of salary in the 1950s to 21% of salary now. The combined cost of all the risks associated with defined benefit pension scheme provision has reduced the attractiveness for employers of providing defined benefit pensions in the private sector.

In marked contrast, active membership of private sector defined contribution (DC) schemes is projected to more than double from 6.6 million to 16 million as the launch of auto-enrolment from October 2012 transforms the provision of workplace pensions in the private sector.

This fundamental transformation of the private sector pension landscape in the UK means that most of the complex and often little-understood risks associated with providing a pension (namely longevity, investment and inflation) are being transferred to future new employees.

"The future of private sector pension provision is defined contribution and the launch of auto-enrolment in October will significantly expand membership," said Wayne Daniel, CEO of MetLife Assurance.

"Managing the legacy liabilities and assets of defined benefit schemes is a major issue for the pensions industry. The industry has to work harder to explain what is happening and how employers, trustees and employees should respond. The PPI report is a major contribution to increasing understanding of the challenges facing private sector pension provision."

Rising costs and risks for sponsoring employers and trustees of running defined benefit schemes has highlighted strategies to mitigate liabilities with risk transfer deals such as buyouts, buy-ins and longevity deals reaching around £40 billion between 2007 and 2011.

However, that represents less than 3% of total defined benefit liabilities which the report says 'may indicate that, subject to market capacity and affordability, risk transfer deals could increase in the future'.

"Currently, just 16% of defined benefit schemes are open to new members compared to 36% in 2007 with replacement defined contribution schemes attracting lower employer contributions," continued Wayne.

"Since the individual member assumes all the risk in a defined contribution scheme, it will be important that employees are helped to understand and make informed decisions about what is needed to ensure their future pension provision provides for a comfortable retirement."

But, what of the future?

Although full details have yet to be announced, with a Government consultation due to be published in 2012, a new idea is being discussed - Defined Ambition. The aim of Defined Ambition is to allow for more risk sharing to be used in private sector pension provision. Risk sharing refers to a pension arrangement in which the different risks of pension provision may be shared either between the employer and the employee or between different scheme members. However, it is not yet clear what level of appetite there is among employers to share the risks inherent in pension schemes.

Watch this space, as they say.

To download a copy of the report (PDF), please click: The changing landscape of pension schemes in the private sector in the UK (PDF) and for more information about MetLife:

For more information on The Pensions Policy Institute, please visit:

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