Decade of decline for DB pensions as private sector membership drops 13.6% in a year: Evelyn Partners’ Gary Smith comments

by | Dec 8, 2022

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The number of active members in private sector defined benefit and hybrid pension schemes has fallen 62.6% in 10 years, according to annual data from The Pensions Regulator released this morning.

TPR’s Annual Landscape report on DB and hybrid pension schemes for 2021/22, revealed that as of March this year there were 785,744 active private sector DB and hybrid scheme memberships in the UK, down from 909,502 the previous year – a decline of 13.6%. The number of active members in such schemes has fallen from the 2.1 million revealed in the TPR’s first such report in 2012 – a fall of 62.6%.

Meanwhile, in the public sector there were 6.83 million active members of DB pension schemes in 2021/22 down from 7.48million in 2020/21.[1]

 

Gary Smith, Financial Planning Director at leading wealth manager Evelyn Partners, says that the message for today’s private sector workforce is that they have to take responsibility for their pensions and take retirement planning seriously: 

‘What used to be called final salary pensions are in terminal decline in the private sector. These figures lay bare the private-public sector divide in pension provision, with the vast majority of workers in the private sector responsible for funding most of their pension saving and taking the investment risk. Public sector workers continue to benefit from pensions that are more heavily subsidised and payouts that are pretty much guaranteed – even if income levels in retirement are largely no longer based on final salary, but rather on career averages. 

‘The tumult around long-dated Government bond holdings that came in the wake of the Kwarteng mini-Budget caused reputational damage for some private sector DB pension schemes but in the end members’ pensions were unaffected. Such schemes are ultimately underpinned by the employer and in the event a firm goes bust, the Pension Protection Fund is there to provide a backstop. In any case many schemes’ funding positions have improved this year. 

 

‘However, the transfer values of defined benefit or final salary pensions have taken a huge hit thanks to rising bond yields, so someone with such a pension will be getting a much worse deal if they were to cash it in now than they would have done at the start of the year [2]. It rarely makes sense to transfer out of the security a DB scheme and any decision to do so should be accompanied by specialist advice. 

‘The advantages of retaining final salary pensions must also be kept in mind by workers who are tempted to consolidate a number of old pension pots – in case one of them offers a valuable defined benefit.’ 

Notes

 

[1] Public service pension schemes provide pensions for civil servants, the judiciary, local government, teachers, health service workers, members of fire and rescue services, members of police forces and members of the armed forces. These schemes cover over 17.2 million memberships, and around 25,000 individual employers. There are 21 public service pension schemes. Of these, the Local Government Pension Scheme, Fire and Rescue Service Pension Scheme and Police Pension Scheme are locally administered. The TPR treats each of the locally administered sections as a separate scheme and therefore regards the public service landscape as having 204 schemes. Until 2015, pension provision in the public sector was provided on a final salary basis. Since then, however, workers in all open public service schemes have accrued benefits on a Career Average (CARE) basis.

[2] XPS Pensions’s Transfer Value Index hit a record low below £150,000 in October. That was 55% of the £270,000 value seen at this time last year. The index shows the estimated cash transfer value of a 64-year-old member with a pension of £10,000 a year with typical inflationary increases

 

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