Defined Benefit Pensions are where the Company or pension group guarantee a return based on the final years of salary, which are built up on the basis of the number of years of service in the scheme; effectively earned benefit dependent on total contributions made.
They can be extremely generous with Employers matching or exceeding Employee contributions and as a result of good investment management and low running costs, unfortunately they have been in decline due to a number of different reasons, with Companies viewing them as a liability.
Funds are invested with varying degrees of risk and are therefore subject to market fluctuations, becoming subject to State demand on adequate reserves, however no one defined adequate and assessments were made at market lows, with insistence that Companies make up the difference immediately.
This resulted in excessive extra Company contributions at the worst time of high cash flow pressure, creating the impression of loss making pension schemes and a mass exodus to lower cost defined contribution schemes. The position was made worse by taxation on dividends, the introduction of a pension levy to cover failed Companies in default and large remuneration rises before retirement not covered by contributions.
There have been several studies in the US on this that show DB schemes well out perform DC ones, even more so with the collapse of annuities, with positive effects on cash flow and large benefits on Employee goodwill and loyalty. It represents a major worthwhile investment for both employer and employee.
Recent rises in the Stock Market has resulted in a major recovery in Pension Funds, with many holding their own with modest growths of 5%, long term growths as high as 8.8% over 25 years have been reported. At this level even with modest contributions, good performance is virtually guaranteed.
This is the advantage of DB schemes, which makes them the best way forward for all concerned and a sound insurance against all future trends. Instead of being the privilege for the 10% minority, their excellence should and could be available for all to enjoy, it just needs the will and foresight.
The real advantage is that of self sufficiency and security, part of the overall Fund is yours and providing the contributions are maintained for the specified period, the outcome is guaranteed. Of course there have been rogue employers, who have used Funds for their own benefit, but the majority are independently managed.
This is more than can be said for the State schemes, who are one of the worst offenders; contributions have not been put aside, the money has been squandered and is now no longer available for those who paid in for the whole of their working lives.
The week saw an announcement that the State had a positive balance in its Budget, pat of this was due to the closure of the successful Post Office Dined Benefit scheme and the transfer of its assets. A good day for the Treasury but a sad day for Post Office employees who saw their pension future disappear into the chaos of Public Sector Pensions. It died without a murmur of complaint or good reason.
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