Defined benefit pension decline: the consequences for organizations and employees
| Date | 30 September 2014 |
| DOI | https://doi.org/10.1108/ER-02-2013-0020 |
| Pages | 654-673 |
| Published date | 30 September 2014 |
| Author | Ebony de Thierry,Helen Lam,Mark Harcourt,Matt Flynn,Geoff Wood |
| Subject Matter | HR & organizational behaviour,Industrial/labour relations |
Defined benefit pension
decline: the consequences for
organizations and employees
Ebony de Thierry
Department of Strategy and Human Resource Management,
Waikato Management School, University of Waikato, Hamilton, New Zealand
Helen Lam
Centre for Innovative Management, Faculty of Business, Athabasca University,
St. Albert, Canada
Mark Harcourt
Department of Strategy and Human Resource Management,
Waikato Management School, University of Waikato, Hamilton, New Zealand
Matt Flynn
Newcastle University Business School, Newcastle University,
Newcastle, UK, and
Geoff Wood
Warwick Business School, University of Warwick, Coventry, UK
Abstract
Purpose – The purpose of this paper is to use the theoretical and empirical pension literatures to
question whether employers are likely to gain any competitive advantage from degrading or
eliminating their employees’ defined benefit (DB) pensions.
Design/methodology/approach – Critical literature review, bringing together and synthesizing the
industrial relations, economics, social policy, and applied pensions literature.
Findings – DB pension plans do deliver a number of potential performance benefits, most notably a
decrease in turnover and establishment of longer-term employment relationships. However, benefits
are more pronounced in some conditions than others, which are identified.
Research limitations/implications – Most of the analysis of pension effects to date focuses
primarily on DB plans. Yet,these are declining in significance. In the years ahead, more attention needs
to be paid to the potential consequences of defined contribution plans and other types of pension.
Practical implications – In re-evaluating DB pensions, firms have tended to focus on savings made
through cost cutting. Yet,this approach tends to view a firm’s people as an expense rather a potential asset.
Attempts to abandon, modify, or otherwise reduce such schemes has the potential to save money in the
short term, but the negative long-term consequences may be considerable, even if they are not yet obvious.
Originality/value – This paper is topical in that it consolidates existing research evidence from
a number of different bodies of literature to make a case for the retention of DB pension plans, when,
in many contexts, they are being scaled back or discarded. It raises a number of important issues for
reflection by practitioners, and highlights key agendas for future scholarly research.
Keywords Organizational performance, Performance, Commitment, Economic crisis, Pensions,
Terms and conditions of employment
Paper type Literatu re review
Introduction
As the baby boomers approach retirement, all developed economies face the challenge
of increasing demands on pension schemes. A feature of contemporary capitalist
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0142-5455.htm
Received 12 February 2013
Revised 21 June 2013
2 December 2013
10 April 2014
Accepted 22 April 2014
Employee Relations
Vol. 36 No. 6, 2014
pp. 654-673
rEmeraldGroup PublishingLimited
0142-5455
DOI 10.1108/ER-02-2013-0020
654
ER
36,6
economies has been a fundamental shift in the balance of power betw een employers
and employees in favour of the former. This has encompassed significant declines
in job and occupational security (Standing, 2011), a reduction in the propo rtion of
middle-ranking “good jobs” (Wright and Dwyer, 2006; Dallinger, 2013), and a general
shifting of risk away from the state and employers and onto employees (Streeck, 2009;
Standing, 2011; Cleal et al., 2013). The latter has encompassed moves towards more
contingent pay, the reduction of deferred benefits including pensions, and the
weakening of implicit contracts. On the one hand, national eco nomies retain distinct
features. On the other hand, as Jessop (2012) notes, within the global ecosystem
neo-liberalism has attained a durable dominance, even though its risks and failu res
have become more apparent with the recent financial crisis. The UK has, in many
respects, been one of the pioneers in embracing neo-liberal reforms. This shifting of the
risk onto employees, and the decline of workplace-based pensions has meant that
increasing numbers of older workers face an impoverished old age. As a result, the
UK’s experiences are particularly wo rthy of consideration, given common pressures on
other nations to follow suit in a process that has been associated with worsening ter ms
and conditions of employment for many employees.
The two main forms of occupational pension schemes in the UK are defined benefit
(DB) and defined contribution (DC). With DB schemes, the final pension income is
clear; there are a number of different formulae that an organization can choose to
follow, but the most common bases pensions on the employee’s final years of salary. In
contrast, with DC schemes, financial contributions to the plan are explicitly defined,
but there no guarantees of final income. Group personal pensions are personal pension
arrangements, arranged by the employer typically to qualify fo r group discounts on
management and other fees. In such schemes, employers nor mally deduct employee
contributions from wages or salaries, and sometimes make additional contributions of
their own, and operate in much the same way as DC schemes. Group stakeholder
pensions are very similar, but these schemes permit less scr upulous employers
to charge their own consultancy fees, especially du ring an employee’s first year on
such a scheme. For employees who often switch jobs, these charges can wipe out a high
proportion of pension wealth, leaving little or nothing for retirement (se e Blake, 2000).
This paper examines recent developments in the area of pension benefits,
particularly relating to the shift from DB plans to DC plans, and analyzes the
implications of such a change for both employees and employers. On the one hand,
the process genuinely does constitute a shifting of risk towards employees, and, it
could be argued, holds commensurate benefits for firms. On the other hand, it could be
argued that most “normal” firms lose out in the process of liberalization (neo-liberal
reform) and financialization (Engelen et al., 2011), and that the real beneficiaries of t his
trend are financial intermediaries and short-term investors.
An occupational pension is a long term, deferred fo rm of remuneration used
to provide income to an employee when he or she retires, as compensation for work
performed in the present (Milkovich and Newman, 1990). Occupational pensions are
currently in crisis in the UK and elsewhere. UK pension coverage is narrowing and
pension benefits are shrinking, with potentially major repercussions for the incomes of
the elderly UK population, as those over age 65 currently receive most of their income
from this source (DWP, 2013b, p. 33). Many private-sector employers have switched
from DB to DC pensions to reduce costs and transfer financial risks to employees.
Others have simply stopped offering any pension at all to new staff (Forth and Stokes,
2012). Most no longer offer early retirement as an option, and even encourage
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DB pension
decline
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