The Review of Pension Provision in KCOM
As you will of course be aware, we are currently involved in consultations with KCOM about pensions.
The company has announced that it wishes to close their existing pension schemes to future service accrual, replacing them all with a single scheme, applying equally to all employees. The company is doing this because it believes its Defined Benefit schemes, which are significantly in deficit, have become unaffordable, and because they want to ‘harmonise’ pension provision across the company.
Prospect (together with the GMB, which also represents many members in the company) are dealing with this as pragmatically as we can. We recognise that traditional final salary pension provision has become very difficult to sustain unchanged, as the result of three principle drivers:
• People are living longer, which greatly increases the cost of pension provision.
• Investment returns are lower than they were, meaning that funds are becoming stressed.
• Regulatory change is having a major impact on all schemes. The Pensions Regulator is insisting that schemes take a very conservative approach to their long-term viability and this translates into higher contribution rates and higher deficits than might otherwise have been the case.
These three drivers are causing employers across the UK to take steps to reduce both their costs and the open-ended risks they face. Few final salary schemes in the UK are now open to new employees, and many companies are closing their schemes to future service.
We cannot simply ignore the pressures KCom – in common with most employers – face. Changes must be made if pension provision is to be viable for the longer term. By its nature pension provision has to be long term, so we must seek long term solutions.
KCom’s Proposals
That said, the proposals from KCom are in our view both unacceptable and unreasonable. The basic proposal is to put in place Defined Contribution arrangements with such a low employer contribution rate that the pension they would generate, even taking into account the State Second Pension (S2P), would be much lower than the existing DB scheme would generate.
Consequently, we and the GMB have put proposals to the company for an alternative and better approach. You can read the details by clicking here
I appreciate that this letter is long and difficult to take in. It is inevitably technically complex and closely argued.
In summary, we are arguing that
1) The company should re-think its approach. It would be perfectly feasible for the company to make three important changes to the DB arrangements, which taken together would reduce the costs of this scheme in terms of future service and would also substantially reduce the company’s exposure to future open-ended risks.
The DB arrangements will continue for many years to come, even if they are ‘closed’ in relation to future accrual. That’s because it is not open to the company to reduce or change people’s existing pension benefits, which result from service so far in KCom. So the deficit, the need to continue to pay pensions to existing pensioners, and the need to pay pensions to people who are or will become deferred pensioners, are not really impacted by the decision to close the scheme to future accrual.
The fact is that the DB schemes will continue, as will their administrative and governance arrangements, for many years to come.
We estimate that if the company adopted our proposals for changes to the DB arrangements, their costs in respect of future service would fall to about 10% of pay roll. The company cannot escape its deficit obligations. They will continue whether or not they adopt our proposals or press ahead with their own. Our proposal is both practical and affordable.
Alternatively
2) Given that the existing DB scheme membership has a completely legitimate expectation that future service will generate a given and defined level of pension, any Defined Contribution scheme introduced to replace the existing scheme should be capable of generating broadly comparable pensions.
That would mean a much higher contribution rate from the employer than the company currently proposes. Our letter spells out just how much higher. But in broad and simple terms, in order to generate a broadly comparable pension the total contribution to the scheme (from the employer and employee combined) would need to be about 25%. Assuming you continue to make a contribution at the same level as your current contribution, that would mean a contribution from KCom of about 18% to 20%.
The company currently proposes a maximum contribution from the employer of typically 8%.
Our basic proposal is that it would make far more sense for the company to modify the DB arrangements. That would be both cheaper than DC for the same level of pension and in our view much more palatable for employees in the DB schemes.
We are arranging meetings to discuss this issue with members. Look out for news about the meetings and the discussions on
http://sharepoint.kcom.com/sites/Rialto/Blog-KCPS/default.aspx (KCPS members only)
Alternatively, http://sharepoint.kcom.com/sites/Rialto/Pages/Default.aspx then click on About My Pension and then follow the button to your scheme’s blog
We know some of you have now transferred out of the company as the result of TUPE transfers. If you no longer work for KCom, could you let us know either by replying to this email, or by changing your personal details on our records via our web site.