Pension risk : Do employees care?

Written by: Vrinda Gupta

Summarize by: Mohd Azizi Amin Nunian

In the UK, company-sponsored pension plans have traditionally filled the gap left by state pension and private saving. Most of the defined benefit (DB) schemes are managed as final salary schemes and many have traditionally invested a large proportion of asset in equities. Increasing longevity of the population in the UK coupled with stock market volatility has made final salary scheme unattractive and risky for employers. The majority of employers have closed down final salary schemes to new entrants. Other employers are diluting risk by encouraging workers to retire later and have increased the age at which the full retirement benefits starts accruing to the employees from 60 to 65 years.

Employees who have a DB pension scheme, them have experienced no changes to their pension rights. Based on Watson Wyatt Pension Risk Indicators database (PRI), the average pension liabilities is high, the deficit on the pension accounts for companies is not as high, with half of the companies having pension deficit well within the range of five per cent of companies market capitalization. The fact that large number of companies has massive pension liabilities when compared with companies capitalization implies that these companies are more likely to default on their obligation to provide for the retirement of their employees. Even companies with a smaller pension-deficit-to-market-capitalization ratio also run a risk of defaulting on their obligations owing to large uncertainties regarding the return on pension assets, future salary increases and pension contributions, as well as general factors such as tax laws.

The dissatisfaction among the employees of firms with large pension liabilities can potentially be explained by a number of factors. It is possible that firm may be having large pension liabilities alongside benefits package that may not compare well with other firms. Or it may be case that employees can perceive that risks attached to the high level of deficits attached to their pension schemes.

As a conclusion, there has been unrest among workers in the UK on pension issues such as closing of DB pension schemes to new entrants, raising the retirement age and reducing benefits. These changes are being put to practice to address costs and risks associated with underfunded DB pension schemes. Employees do seem to care about the level of funding of their benefits with other companies and the industry average. But these do not seem to affect their perception of the management or their confidence in business success and commitment to the firm.