A sea of challenges
Defined benefit (DB) pension schemes face a multitude of challenges, from keeping up with ever-changing legislation and regulatory guidance, to protecting their members from pension scams and generally ensuring good governance.
Whilst a strong governance framework is entirely necessary and appropriate - to protect members’ retirements - it places a very heavy time and cost burden on smaller schemes in particular. Poor governance and scams are not the only risks to members’ benefits.
The single biggest threat comes from the insolvency of the employer, which almost always leads to a cutback.
Risk to members’ benefits
Each year, around 1% of schemes enter the Pension Protection Fund (PPF). Over the lifetime of a scheme, the risk of insolvency is significant, even for the strongest employers.
The Pensions and Lifetime Savings Association (PLSA) modelling showed the risk of benefit loss to be 6% in schemes supported by a Covenant Grade 1 (CG1) or ‘strong’ employer.
On top of these risks and governance challenges, smaller schemes suffer from huge diseconomies of scale, with running costs that are typically a multiple of the costs that large schemes pay for the same services (when expressed on a cost per member basis).
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Last update: 15 September 2021