LONDON - Britain's largest trade union federation, the Trades Union Congress, is calling for the U.K. government to "incentivize or compel" plan sponsors to make the same contributions to defined contribution plans as they would to defined benefit schemes.
"A purely voluntary approach to employer contributions into defined contribution schemes has failed," said Tom Powdrill, TUC senior policy officer, in a paper published late last month designed to kick off a nationwide campaign in defense of occupational pension plans.
In the paper, Mr. Powdrill warned the U.K. government's pension policy could unravel unless it enforced shared responsibility between employer and employee in the provision of these occupational pension funds. Inadequate provision by the plans could trigger increased dependence on state pension benefits, he said.
Minimum compulsory employer contributions may solve this problem, he suggested.
Mr. Powdrill's proposal could carry some weight: The TUC is a big backer of Prime Minister Tony Blair and the Labor Party. But more likely to come are changes made through negotiations between employers and unions, as trade unions make pension provisions a priority and become more active in challenging employer changes to existing arrangements.
According to a survey published late last year by the National Association of Pension Funds, London, the average employer contribution to a final salary defined benefit scheme was 15.45% of an employee's annual salary.
The average employer contribution to a defined contribution plan is 6% of salary. As a result, an employer typically pays L2,115 ($3,021) less per employee into a defined contribution plan, he said.
The TUC campaign comes as the Transport and General Workers Union remains locked in negotiations with Iceland Group PLC, Deeside, over the future of its L577 million defined benefit plan. The company announced in February it would freeze assets in the defined benefit plan and move the 4,400 members to a new defined contribution vehicle.
Iceland spokesman Michael Sandler said negotiations between the sponsor and plan trustees should be completed by June, after which the new defined contribution plan would be set up.
Legal action
Andrew Dodgson, spokesman for the union, said the union had not ruled out the possibility of taking legal steps against Iceland to prevent the complete closure of the plan, although so far no specific action was planned.
The TUC's Mr. Powdrill said in an interview that in many cases, there's not a lot a trade union could do if a plan were closed to new members, because any pension plan was due to the generosity of the sponsor. "All we can do is make the counter arguments. There are a lot of plans being closed down at the moment, and the arguments made to justify this are often rubbish," he said.
Mr. Powdrill said the TUC was not yet considering strikes or industrial action.
Instead, the TUC wants to encourage employers to seek alternatives to closing defined benefit plans.
Such alternatives include ensuring the defined benefit plan has contributions from both sponsor and employees, making accrual rates more sustainable, or launching a career-average plan, in which final payout is based on employees' average salaries over their working careers with the company. Companies switching to career-average plans from final-pay plans include Tesco PLC, Cheshunt; Nationwide Building Society, Swindon, England, and the Pension Trust, London (Pensions & Investments, Dec. 10).
The L3.1 billion defined benefit Marks & Spencer Pension Scheme, London, which closed to new members in March, was non-contributory for employees.
Mr. Powdrill said the TUC was not opposed to the use of defined contribution plans, unless the sponsor used them to reduce its overall level of contributions.
"But we think defined benefit is a better model because it provides a guarantee. Modifications to an existing scheme are preferable to the closure of a scheme to new employees and its replacement with a generally inferior defined contribution alternative," he said.
Arguments that defined contribution arrangements were better suited to a mobile work force are only valid for workers younger than 25, he said.
While the rate at which younger workers changed jobs had increased since the 1970s, time spent at the same employer was virtually unchanged for workers between ages 25 and 49, he said.
Mobility of employees was an argument for providing both defined contribution and defined benefit plans, rather than just scrapping defined benefit plans entirely.
"It is illogical for companies to base their pensions strategy around the needs of employees who leave them," the paper said.
Mr. Powdrill also was concerned that the switch to defined contribution plans would undermine the U.K. government's wish that pension funds invest more in venture capital and private equity. Individuals choosing their investment mix in defined contribution plans tended to shy away from these asset classes, he said.
