2. Reviewing, assessing: is TPS always best?

Defined benefit pensions are routinely characterised as ‘gold-plated’, but scratch below the surface and they may not be as valuable as the label implies.

On the other hand, defined contribution schemes are often criticised for being a poor relation, but a well-designed DC scheme can provide a competitive, valued benefit.

What's the real story?

Although DC member outcomes are less certain, they provide much greater flexibility around how and when you can access retirement benefits.

This could potentially mean lower costs for both employers and staff, although this will depend on the new contribution structure you ultimately have the flexibility on which to agree.

Defined benefit guarantees can be attractive to staff, but they come at a price: they assume the scheme is well-funded and that ongoing funding levels, i.e. employer and employee contributions, are sustainable in the long term.

Since employer contribution rates were reviewed and increased in 2019, schools have seen their bill rise by 75 per cent over this time. In England and Wales, the contribution is now 29 per cent. In Scotland, the cost has gone up 26 per cent. All indications point to further rises in years to come.

Investment risk

DB schemes manage risk on behalf of members, whereas DC members don't have the same level of protection, and their pots can go up or down depending on market conditions.

However, a well-designed default DC investment strategy with an appropriate level of risk versus return for your staff, further protects them by reducing risk as they near retirement. Good scheme governance helps keep everything on track.

Pension freedoms

Unlike most DB schemes, most DC schemes have adapted to the pension freedoms of 2015, giving members greater flexibility to choose when and how they take their retirement benefits in line with their personal circumstances, rather than the often rigid DB rules.

Moving your pot

DC schemes are also much more portable than DB, usually giving members the option to take their pension pot with them when they change jobs and to shop around for the best deals when they decide to start taking their retirement income, whether or not it's a drawdown, cash, buying an annuity or a combination of these.

How much?

Some DB schemes include additional, often valuable, benefits, and there may be costs associated with ending your participation, whether in full or in part. These need to be identified and considered carefully.

Get in touch to find out more about how a DC alternative can measure up to a DB scheme.