IER Seminar

Defending occupational pensions in the private sector

Bryan Freake – Unite Pensions Officer

Why members want defined benefits and final salary

• They are perceived as quality schemes

• They give a clear idea of what pension will be when you retire

• The employer takes the risk

When is DB not DB

• When pension increases are discretionary ?• When pensionable pay is interfered with ?• When pension is adjusted for mortality ?

• Changes like this have the scope to halve the value of the members pension

• Members may have little idea what they will get

Collective DC Schemes

• A DB scheme which allows the employer to fix their cost is a collective DC Scheme

• If pension increases became discretionary and benefits could be directly adjusted for longer mortality

• These changes are calculated not just to deal with inflation and mortality risk but also to cover investment risk

The enemies of DB ?

• Actuaries – who allowed the boom and failed to protect us against the bust

• Accountants – who have destabilised company accounts – and may go further with a risk free liability assessment

• Pension Consultants - who started the rush to Dc and overlooked alternatives

Who else can we blame ?

• The Government – as much good as there has been bad

• The Markets – inevitably but perhaps not deliberately

• Employers – are they justified in breaking their promises

• Pensioners –outstaying their allotted span

The Tory threat

• Pulling up the public sector anchor

• Raising State Pension Age quicker

• Taking de-regulation of pension increases further

• Allowing mortality to impact past service

Lets look at some Hybrids

• Barclays

• Unilever

• BAe

• Johnson Matthey

Barclays

• 3% contributions for 20% ‘cash balance’ at age 60

• Cash balance revalued at RPI + up to 2% based on investment performance

• Plus a DC element with a match of up to 3% for 3%

• Contracted-in

Unilever

• New entrants scheme• 5% for a 1/60 CARE benefit at age 65 on

salary between £4500 - £38,000• CARE revaluation RPI up to 5% - upper

salary threshold linked to Unilever pay increases

• Company pays 12.5% salary /pension allowance on pay above £38,000

BAe 100

• New entrants scheme

• 1/100 final salary benefit

• 2% credited to DC account

• Member contribution 4%

• Longevity adjustment factor

• Contracted-in

Johnson Matthey

• Non-contributory 1/80 CARE scheme benefit at age 65

• Employee contributions matched in DC supplement to a maximum of 3%:3%

• Contracted-in

Hybrids that did not last

• Action for Children

• Alstom

• Goodyear

• Smiths

• De La Rue (proposed closure)

DC schemes paying at least 10%

• Akzo Nobel, AMP, Aviva

• BAA, BOC, Diabetes UK

• Finn Mechanica, Friends Provident, HSBC

• L&G, National Grid, NFU Mutual

• Phillips, Prudential, Reckitt

• Rolls Royce, RSPCA, Siemens

Transitional Compensation

• Steria – DC contributions individually targeted to have a reasonable chance of replicating previous DB benefits

• Fujitsu – (proposed) – 5% uplift in salaries to compensate for switch to a 5%:10% DC scheme

• Siemens – DC with matching up to 10%:10% with special contribution supplement for 15 years at maximum declining from 10% to 5% over the period

Where are we Going

• 80% of DB schemes closed to new entrants compared to 20% in 2000

• 20% closed to further accrual by existing members and rising more rapidly

• Current law allows plenty of scope for risk sharing

• Increasing flexibility may only accelerate the decline in scheme quality

Resisting the Tide

• Employers are forced now to consult

• We must make them negotiate

• There is always scope for a better deal

• Unite is pledged to support members prepared to take action to defend their pensions