Getting people out of the current pension scheme…

I’ve had a fascinating email exchange with Lucy Adams, trying to answer an apparently simple question; how do the BBC’s proposal reduce the deficit so substantially when all the alternatives seem to only have a minor impact. Lucy has gone into some detail, and its very revealing. The bottom line is this: the attraction for the BBC of its proposals is twofold. First, because they are so stingy it’s possible to reduce the deficit with a smaller contribution from the BBC. But secondly a significant factor is that it is assumed that many – if not most people will be persuaded to leave the scheme. This is therefore one of the main aims of the proposals – quite explicitly as you’ll see from the quotes below. To go into a bit more detail…

I had asked what would happen if the proposal was changed to the following: each year pensionable salary rises in line with your pay rise or inflation, whichever is the lower. In summary the effect of this would be that if you had a big jump in salary (for eg because you’re promoted) then your pensionable salary wouldn’t reflect this. But in years where there was an annual pay rise you would at least get inflation (or close to it), thereby protecting your existing pension accrual.

This is the bulk of Lucy’s reply:

“If the current proposals are implemented, the expected total cost of pensions for the BBC is anticipated to be between 5% and 6.5% of the licence fee (compared to 3.5% of the licence fee currently, and around 10% of the licence fee if no changes are made). Over time they also help with risk reduction as some members may decide to move to the defined contribution plan for future service. The 1% limit is well below the long term inflation expectation, is perhaps harsh, but has a significant impact on reducing the deficit (and of course expected pension benefits for many members). The proposed changes also provide members with a choice. Members can remain in the Scheme, build up more pensions, albeit with salary increases for pension purposes being limited to 1% pa, or they can join the defined contribution plan instead. By doing this they can get inflation protection on the benefits built up to date and build up a fund to provide extra pension for the future.

An enhanced variation of the proposed limit on future pensionable salary [ie my proposal] increases will increase costs and likely result in fewer members moving to the defined contribution plan for future service (and achieving less risk reduction). By just increasing the limit from say 1% to 2% (still below long term inflation expectations) would result in an additional cost of c£20m p.a. Some form of inflation proofing, as you suggest, would increase costs further (as well as reduce the number of members moving to defined contribution).”

That’s three mentions of the desire to move people out of the current scheme.

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2 Responses to “Getting people out of the current pension scheme…”

  1. Chris Says:

    Interesting but perhaps not terribly surprising: under the current proposals, I suppose it could be argued that at least the BBC is offering members a choice when it could take the view that it needed to close the scheme, period, which I guess would have the merit of simplicity, if not much else.

    As for making up the deficit in other ways, I rather like this idea picked up by the Evening Standard for a creative use of the profit made by BBC Worldwide

    Chris

  2. renouj21 Says:

    Yup, the idea of using the profits from WW is one that the BBC seems strangely reluctant to consider

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