Occupational pensions forall employees

AuthorD.R. Cooper
Publication Date01 Apr 1999
pensions for all
Employee Relations,
Vol. 21 No. 2, 1999, pp. 145-158.
#MCB University Press, 0142-5455
Received September
Revised December 1998
Accepted February 1999
Occupational pensions for
all employees
D.R. Cooper
City University, London, UK
Keywords Employee benefits, Pensions, Retirement, Risk
Abstract Defined benefit occupational pension schemes are a valuable employee benefit. This
paper looks at probl ems in their design an d considers whether i t is possible to addre ss them.
The risk profile of money purchase schemes is described, with particular reference to employees
in less secure employment categories. These considerations are set alongside the requirements
employers have from occupational pension schemes. The conclusion is that money purchase
schemes fail to meet employees' needs, in particular at a time when the security and level of
state pensions is being progressively eroded. An alternative defined benefit structure is
proposed, that is, the revalued career average pension scheme. It is argued that this benefit
structure can be made attractive to both employers and employees, as it addresses many of the
problems associated with final salary schemes and provides pension scheme members with the
security they value.
1. Introduction
Compulsory pension provision (currently) in the UK applies only to those in
paid work and making National Insurance contributions. It comprises the Basic
State Pension (BSP), which amounts to a maximum[1] of approximately 15
percent of average earnings, and the state earnings related pension (SERPS),
which aims at a maximum replacement rate of 20 percent of earnings between
the lower earnings and the upper earnings limit (currently about 15 percent and
130 percent of average earnings respectively). Because the BSP and the lower
and upper earnings limits are uprated in line with inflation, rather than in line
with average earnings, their value relative to earnings is steadily falling at such
a rate that the financial significance of the BSP is expected to be virtually
negligible in 30 years time.
For many employees, state pensions provide the only relatively predictable
components of their future expected retirement income. With the exception of
those able to join their employer's defined benefit occupational pension scheme,
employees have to rely on money purchase arrangements, where the eventual
benefit depends on the contribution individuals are able to afford, the expenses
deducted from the contributions, and the performance of the investment
Since 1986, employees have been able to ``contract-out'' of SERPS into
personal pensions. Those opting to do so replace a benefit targeted at a certain
level of replacement income with a money purchase plan and so increase the
uncertainty of their retirement planning. Moreover, employers are increasingly
replacing defined benefit pension schemes with money purchase pension
schemes, passing on the investment risks of providing for retirement to the
employee. The government also appears to be considering replacing SERPS

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