Utilities company Pennon has become the latest private sector employer to impose a cap on future increases in members’ pensionable pay, saving the company £15m, while installing a voluntary top-up for members.
Employers are using changes to pensionable pay to reduce the cost of ongoing defined benefit pension schemes. Lloyds Banking Group halted pensionable pay increases, saving the employer £710m.
From July 1 this year Pennon introduced a 2.5 per cent cap to the pensionable earnings of members of its £629m DB scheme, which remains open to future accrual but is closed to new joiners.
After consultation with members, the Exeter-based water utility and waste management company offered an additional voluntary contribution arrangement into its defined contribution scheme to allow DB members to make pension top-ups (see box).
Pennon staff can contribute 3, 4 or 5 per cent of any pay increase they receive above the cap and the company will make a corresponding 6, 8 or 10 per cent matching contribution.
Pensions manager Gavin Coulstock said: “The decision to allow members to join the DC scheme, a sub-section of the DB scheme, came in direct response to concerns raised in consultation. We put in place this modification to alleviate concern.”
Pennon’s decision to offer members the opportunity to enhance their future benefits with DC contributions has been met with “a lot of a positive internal feedback”, he added.
The company has designed communication material to explain how contributions above the cap would pay off at retirement.
Source: Pennon
Following the changes to the company’s benefit design, Pennon reported an exceptional credit of around £15m, which it reported was £12m net of tax, in its half-year report released last month, identifying the cap as a contributory factor.
Hugh Nolan, chief actuary at JLT, said the current economic environment, with consumer price inflation running at 1.3 per cent, was a good time to have the conversation about implementing caps.
“There is a concern that there won’t be recognition of the impact it could have in the long term if inflation takes off in the next five to 10 years. The cap could eat into people’s benefit in real terms,” he said.
Danny Wilding, partner at consultancy Barnett Waddingham, said he thought caps on pensionable pay increases had the potential to spark a member response because the impact is not uniform across the membership.
“Those who are a long time from retirement will see the greatest impact, particularly those who have good future promotion prospects and earning expectations considerably more than their current salary. It’s unsurprising if they feel aggrieved by that,” he said.
Raj Mody, head of UK pensions at consultancy PwC, said he thought a cap on pay increases was a fairly moderate strategy to manage the risk of future liabilities.
“Companies have to manage the risk of their DB schemes over time – [scheme members] must consider what the range of possible options were that could have been implemented,” he said.
