The Pensions Trust has a rich history, but has been criticised for giving conflicting messages about defined-benefit schemes. Gareth Jones mediates.  

Founded in 1946 as the Social Workers Pension Fund, the Pensions Trust has grown into a popular custodian of charity pension schemes, now looking after 150,000 staff in 4,300 organisations. Earlier this year, however, the Trust came under fire from David Davison (pictured right), head of public sector, charities and not-for-profit at pension consultancy Spence & Partners. In a blog post, he accused the Trust of sending mixed messages on the viability of defined-benefit (DB) schemes, highlighting two articles in which the Trust’s chair Sarah Smart (pictured left) appeared to warn of the risks of DB, and comparing these with another on the schemeXpert website in which she proclaimed her hope that they may be “Rasputin-like in their resilience and stubbornly refuse to lay down and die.” She was also quoted as saying she had turned a seminar on defined-contribution (DC) scheme governance into a sales pitch for DB.

Davison's remarks do bear consideration. Most readers will have heard the tales of organisations with huge DB liabilities they cannot afford, and employers, particularly in the private sector, have responded by closing down their DB schemes in favour of the safety of a DC arrangement.

Davison believes the vast majority of charities with schemes managed by the Trust should move to DC. “These organisations have seriously insufficient asset-backing to be able to provide a defined-benefit pension arrangement. You’re talking about predominantly very small organisations.” He adds: “DB schemes are discredited in the private sector because organisations have recognised they can’t afford the risk of contribution costs rising and the uncertainty of the future cost overall. They’ve basically run for the hills.”

Davison also argues the Trust has a commercial imperative to promote DB. It runs 30 stand-alone finalsalary schemes and four multiemployer final-salary schemes, alongside a multi-employer careeraverage revalued earnings (CARE) scheme (a DB scheme where the pension size is defined by the employee’s earnings across their career with the employer, rather than just on their final salary). Conversely it has just three DC schemes, plus one hybrid DB/DC. Some 25 of its 35 DB schemes are closed to new members, but the Trust’s website certainly promotes final salary as an option for charities to consider, though it does warn that “the cost of offering this type of scheme can be significant and change regularly”.

According to Davison, the Trust needs to keep new people coming into its DB schemes in order to replace the contributions lost as older members retire. He also believes that the Trust is unable to shift its focus to DC: “From a budgeting point of view they just don’t have the resources to invest in DC schemes in the way a lot of the big insurance companies have.”

Defence of DB

So how does the Trust respond to these allegations? Speaking to Civil Society, Smart began by highlighting CARE schemes, which are still DB-based but which are more affordable. They also allow organisations to reduce the accrual rate from the standard 1/60th of salary to a less generous contribution of 1/100th or 1/120th.

“CARE schemes still have all of the risks associated with defined benefit in that if you have not paid, have not realised how much it’s going to cost today and people start living longer then it’s going to cost you more in the future. So I fully accept there are going to be some organisations which want to pay in their own amount today and that’s it. But I think there are other organisations which are going to think that putting 10 per cent in a defined-contribution pension scheme is actually not going to deliver a very good pension for their employees. And for organisations where employees are likely to work there for most of their lives, as they may well do in a housing association for example, I think that a 1/120th career-average scheme may well be what they want.”

As for standard DC schemes, she argues that they don’t offer sufficient value. “If I save for my retirement in a defined-contribution scheme, then all the investment risk is with me. If the equity markets are in a slump when I retire, I’m going to get a bad pension.” With DB on the other hand, she argues: “If we say, ‘you’re a different age to me, so if we pool our investments, the likelihood of the markets being bad both when you retire and when I retire is probably less than half’. Multiply that thousands of times and you get a very efficient investment model, and a huge reduction in risk.”

For Smart, this is an issue that needs further debate. “The reason why we are choosing to make noise about defined benefit is because we don’t just want people to say ‘the future is defined contribution’, and then that’s it. I think it’s actually a really poor model for investment yet everyone just accepts it.”

Smart says the Trust is nevertheless planning to do more work on a DC basis, and wants a relaxation of regulations in the UK which prevent DC schemes being run on a collective basis. “It can have its drawbacks as well, but the good thing about collective DC is that the company and the employees pay a fixed amount, but all the investments are invested collectively and the benefits are paid out depending on how well those investments do. It’s quite a common model in the Netherlands.”