12th January 2015
The members of Tesco’s generous defined benefit, AKA final salary pension scheme, have really paid the price for the mismanagement of the last few years writes Mindful Money editor John Lappin…
The story was nearly lost amid praise from market commentators but was reported in FT.com last week.
The FTSE 100 supermarket has won praise from investors and a big market boost for its radical turnaround plans but one downside is that the workforce will no longer get access to one of the few remaining gold standard pensions in the private sector.
The fact that the benefit and not the contribution is ‘defined’ – makes these pensions an excellent thing to have. Most businesses have abandoned these schemes for a host of reasons. Increased life expectancy – something outside their control – has made the defined benefit even more valuable but also even more expensive. You can also blame both big political parties for rather careless stewardship over three or four decades with the Conservatives (last time they had a majority) allowing firms to take ‘pension contribution holidays’ while one of Labour’s pension stealth taxes involved abolishing tax credits for pension funds on advance corporation tax.
READ MORE: Tesco unveils massive cost-cutting plans
Yet Tesco had stood above the fray maintaining its scheme, at least until the current crisis.
Now the supermarket has gone the whole hog and shut the scheme to existing members as well as new employees. Often schemes shut to new members first as part of a transition phase.
Essentially the investment risk will be transferred to employees. What the employee and employer contribute plus the investment returns is set to dictate the level of the pension. Sadly as well as transferring risk, the move to defined contribution pensions is often accompanied by a sharp fall in the employer contribution so the pension is both riskier and worth less. Employees would do well to keep their eyes on the details of any new offer.
In many ways this is one of the risks of working in the private sector and arguably one not talked about enough. DB pension promises have to be met – it is the law. Defined contribution, doesn’t contain such a promise.
Working at Tesco and being in a new scheme is now likely to mean you have less money in retirement than you thought from your years of work. Those employees may reflect that this development is as much the fault of a dysfunctional business model, one that was so aggressive in terms of its obsession with short terms results and indeed around its relations with suppliers, it actually proved self defeating.
It is actually reminiscent of the banking sector in the UK. Once again in this instance, many employees suffered out of proportion to the big bosses though in the case of the banking sector, because of employee share schemes rather than necessarily the pension on offer.
One has to wonder if in terms of employee relations it makes Tesco a little bit like ‘just another supermarket’ for staff. The financials look good to the market but is this really the way to get employees on side for the big fight back?
Finally, in Mindful Money’s opinion, we wonder if it shouldn’t be beholden on all companies in this situation to make it crystal clear how much a reverse this represents for their workers’ retirement planning. Generally, to make up the benefits on offer from DB schemes requires a big increase in what employees set aside. If they decide not to up their contributions, they should at least understand the implications.