Defined benefit pension schemes

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For many years, the gap between public and private sector pension provision has been widening considerably – the sense of manifest injustice is certainly becoming stronger. Recent developments in the private sector with regard to the financial viability of defined benefit pension schemes are particularly relevant. With falling returns – due to a weak stock market and low gilt yields - many pension fund deficits have spiraled.

The share price ratings of both British Telecom and British Airways are being seriously damaged by their ongoing pension fund liabilities - accounting standard changes now require companies to report their pension fund liabilities in their balance sheets. Few FTSE 100 companies now offer a defined benefit pension scheme to new employees. Even BP has recently announced that it was withdrawing this option. More seriously for the future of such schemes, Barclays has confirmed that its defined benefit pension scheme will be closed to existing employees. In the longer term, few defined benefit pension schemes are expected to survive in the private sector as companies recognize their many drawbacks.

But in the public sector, defined benefit pension schemes are continuing to rack up massive liabilities for taxpayers –a figure of close to £1 trillion has been cited by the Institute of Economic Affairs. Action to stem these vast pay-as-you-go liabilities is vital. Options include levying higher pension contributions on public sector employees, a requirement for them to work longer to secure such benefits and a paring back of pension-related entitlements. Apart from removing the attraction of a defined benefit pension scheme for most new recruits, the Government could also introduce a far more radical option – the phasing-out of its defined benefit pension schemes for most existing public sector employees.

The potential savings would be massive, but such a policy would be controversial. Very controversial.