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What do Austin Powers and Defined Benefit Pension Schemes have in common?

Posted by Candace Benger on Apr 14, 2016, 10:34:44 AM

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Austin Powers.  A funny albeit slightly ridiculous tale of a super spy who has been unfrozen in order to save the world from his also unfrozen arch enemy Dr Evil. 

They both, however, encounter acclimatisation issues when they realise that it's no longer the 1960s; a world of free love and rock and roll, £I million dollars is a mere drop in the ocean to hard core criminals and defined benefit pension schemes are like gold dust. 

The world they knew had gone and it was time to change and adapt to the new one they found themselves in...


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So how is Austin Powers like the the humble Defined Benefit (DB) pension scheme?

Membership to DB schemes reached its peak in the late 1960s and has been in decline ever since.  As result of a wide rage of factors (increased life expectancy, investment risk, inflation rick changes in legislation) the cost of providing DB pensions has increased significantly and therefore many employers now offer a defined contribution arrangement as an alternative.  

Adapting to new challenges

But there are still a substantial number of DB schemes out there and the trustees of these schemes, like Austin and Dr Evil need to face these new challenges and change and adapt to deal with them. 

If a scheme’s funding level  is deteriorating, the easiest, most straight forward way to improve it is to ask the employer for extra cash.  Unfortunately in these still tough times budgets are being squeezed ever tighter and this just isn’t an option.  Changing benefit structures has also become popular with only 16% of DB schemes open to new members in 2011. 

Most DB schemes have experienced a form of benefit structure change be it closing to new members, ceasing future accrual or capping pension increases.

Funding Levels

Trustees need to be more diverse and consider new ways of improving their funding positions.  Changing their asset allocation to achieve diversification in their portfolios or better matching their assets with their liabilities through a liability driven investment (LDI) strategy can reduce exposure to investment and inflation risk. The implementation of  incentive exercises such as pension increase exchange or enhanced transfer valuesor transferring some of the longevity risk to an insurer  through a buy in or buy out.

Heathrow introduced a number of changes to the final salary BAA scheme to reduce ongoing costs and deliver more affordable benefits to employees after the company sought to find £600m in savings.

These changes came into effect from 1st October 2015 following a consultation with members. The scheme’s liabilities have since fallen by £236m, moving it into funding surplus of £165m. (Professional Pensions: – November 2015)

DB trustees need to consider all the options available and like Austin Powers embrace the future and all it has to offer.  Perhaps they could even find a way of making DB sustainable.

Now that would be "groovy baby!"

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Topics: Defined Contribution, Pensions, Defined Benefit, independent trustee uk

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