The current defined benefit (DB) pensions landscape is unsustainable and unaffordable, regardless of the views presented in the government’s latest green paper, former pension minister Ros Altmann has warned.
In her response to the government’s DB pension consultation Altmann (pictured) said affordability was a major obstacle to a workable DB environment in the UK.
She contradicted the paper’s claims there was no affordability problem for employers offering DB pensions.
The Department for Work and Pensions (DWP) consultation on security and sustainability of DB pension schemes ended on 14 May. It set out to explore the key challenges facing DB schemes, including affordability of the schemes.
The paper concluded: “We are not persuaded that there is a general ‘affordability’ problem for the majority of employers running a DB scheme.
“While DB pensions are more expensive than they were when they were originally set up, many employers could clear their pension deficit if required.”
But Altmann argued: “UK defined benefit pension schemes are the most expensive in the world. Over the past few decades, employers who started offering pensions to their staff on a ‘best efforts’ basis, have ended up being forced to take on more and more expensive liabilities.”
She concluded: “The DB landscape is not sustainable as it currently operates. There needs to be more leeway for employers to manage their liabilities.”
The paper also said there was “little evidence that scheme funding deficits are driving companies to insolvency”, arguing “it seems clear that the majority of employers should be able to continue to fund their schemes and manage the risk their schemes are running.”
But Altmann explained new rules for DB schemes meant benefits like spouse cover and inflation linking could never be reduced unless the employer faced bankruptcy, which made DB liabilities “extraordinarily expensive” for employers – far beyond anything they would have anticipated at outset, she said.
Like Altmann, The Pensions and Lifetime Savings Association (PLSA) felt affordability challenges facing DB schemes and employers were more significant than the position set out in the Green Paper.
PLSA director of external affairs Graham Vidler said: “Millions of people in the UK rely on DB pensions for a significant proportion of their retirement income, but the system faces a major funding challenge which needs to be addressed.”