Whose money is it anyway? Avoiding a ‘smash and grab’ on DB schemes

The latest grab on defined benefit (DB) pension money – proposed by the last Conservative government and now resurrected by Labour in what might become known as ‘The Reeves Raid’ – is to enable employers to get their hands on surpluses.  

History has shown that it is never a politically clever move to try to grab pension money and divert it for other purposes. 

As Ros Altmann wrote on her blog in 2020: “The last chancellor in a government with a huge majority who used their first Budget to raid pension tax relief was Gordon Brown in 1997. 

“His infamous removal of dividend tax credits from pension schemes has gone down in the annals of history as one of the major contributors to the demise of Britain’s ‘gold-plated’ defined benefit schemes.  

“Although there were many other factors affecting pensions around that time, there is no doubt that the removal of large sums of money from pensions, which aroused little attention at the time (apart from among pension experts), turned out to be very damaging in the years that followed.” 

Lessons not learned

In 2016 the Conservatives slashed tax relief on pensions but so many GPs and hospital consultants were hit by high tax charges that this had to be changed in order to stop senior NHS staff from leaving or turning down extra shifts. 

Sadly, these howlers never seem to stop the Treasury from having another go. 

This time the idea is to allow employers to get their hands on pension scheme surpluses in an attempt to help the economy.  

This latest attempt demonstrates that the Treasury has lost sight – once again – of what the point is of pensions in the first place. 

Private sector pensions exist to ensure that Britain’s working people do not retire into poverty but can live a decent life. The definition of a decent retirement was given by the 2004 Pensions Commission, which stated that for someone on an average wage a pension equivalent to about two-thirds of their pay is needed.  

How we got here

The Treasury seems to have forgotten what’s happened to DB pension schemes over the last 20 years – a decline that successive governments bear great responsibility for.  

When many people joined DB pension schemes they were often paying around 5% of their wages into the scheme, and their accrual rate was usually measured in 60ths. 

In other words, if they stayed in the pension scheme for 40 years they would retire with a pension worth 40 60ths of their salary, or two-thirds. This, not co-incidentally, is the figure quoted earlier that is needed to keep pensioners out of poverty.  

But as DB schemes took a beating – including from ideologically driven changes to valuation methods – members’ contribution rates escalated so that they are now often paying 8% or even 10% of their pay, while their benefits have deteriorated to accruing in 80ths or even 100ths. 

If your pension scheme accrues at 80ths, then after 40 years of work you would only be entitled to a pension of half your salary, and that ignores the move of most DB schemes away from final salary and instead to career average.  

Since scheme members have taken such a major hit, a government with the voters’ best interests at heart should be proposing that surpluses be used to return the contribution and accrual rates back to how they were.    

The AMNT urges the Treasury to remember what pensions are for, and also to reflect on how badly their previous attacks on pension scheme money affected the retirement prospects of millions of workers.

This will help to ensure that those still in DB schemes can get the best pension possible when they retire. That is what pension schemes are for. 

Reducing members’ contributions is another way to release money into the economy as they would have more of their pay to spend, and it would be a very sensible way to combat the cost-of-living crisis. 

Doing this would also assist intergenerational fairness, in that young entrants to the remaining open DB schemes would be paying less and getting more pension.  

However, if schemes are closed to accrual or this is too complicated, then there should at least be some other process of sharing the surplus with members, including pensioners. 

Smash and grab

Allowing a smash and grab raid by employers on pension schemes will do nothing to help ordinary working people. 

In addition, when some of this capital inevitably ends up increasing the already-excessive boardroom pay awards of wealthy directors – who might just invest some of it in the S&P 500, not in the UK – it will no doubt cause a great deal of unrest. 

The AMNT urges the Treasury to remember what pensions are for, and also to reflect on how badly their previous attacks on pension scheme money affected the retirement prospects of millions of workers. 

Janice Turner is co-chair of the Association of Member Nominated Trustees.