Defined contribution schemes must bear scrutiny

You’d need a heart of stone to be unmoved by the plight of many pensioners in the UK – other than Sir Fred Goodwin. With interest rates a zero sum game and the FTSE 100 below 4,000, those who survive on pension pots are facing tough times.

Final salary pension schemes provide a decent pension but, in the past four years, 160,000 people have seen their schemes wound up. It’s as certain as MPs will fiddle their expenses that more will bite the dust. Thus we have seen the rise of defined contribution schemes.

This combination of defined contributions by employee and employer to buy an annuity on retirement shifts the risk to the employee. If the investments underlying a defined contribution scheme don’t perform well then it is the retiring employee who feels the pain. Of course it means far less risk for employers, compared to offering a final salary or defined benefits scheme. And this risk to the employee does not apply in the public sector, where pension provision is not dissimilar to a Ponzi scheme – the money coming in is used to pay those taking it out. This public-private sector divide will likely fuel resentment among those getting or facing the prospect of paltry defined contribution pensions.

Should employers care? Well they might. Some law firms think that those who oversee defined contribution schemes could be liable for poor investment decisions. It will not be beyond the wit of disgruntled beneficiaries to trigger action.

Arguments could be made that employers are responsible for investment decisions and for advising employees poorly. It behoves employers to ensure that their defined contribution schemes are well run and subject to close scrutiny. Bear in mind that pensioners, and those close to retirement, are becoming increasingly militant.

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