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We all know the price of sugar and chocolate has soared, so it’s no surprise when we find that a Mars Bar costs more than we remember. The real "unwelcome discovery”, however, is when we realize the bar is also significantly smaller. Yes, it tells us the weight in the small print on the wrapper but most of us don’t read this.
This is an example of "Shrinkflation", a phenomenon that many DB pensioners will become all too aware of as they receive their first pension pay slips over the next few years.
Many members will remember that following the 2008 financial crisis, they were asked to pay higher contributions. What many forgot, or didn't fully grasp at the time, was a concurrent change in accrual rates that took place. Like the weight of that chocolate bar, it is an important detail that can be easily overlooked or not understood, until the point of consumption.
This situation will be facing many DB pensioners. For example, in the next few years those finishing a near 40-year career will see roughly half of their pension calculated using these reduced accrual rates. So, for a switch from 60ths to 80ths the unwelcome effect revealed when the member opens their pensions statement will be that, compared to when they joined the pension scheme, their pension will be around one eighth lower than they expected – and that is for the rest of their life. (For some who were moved to 120ths accrual the loss is even more severe at one quarter).
From Deficit to Surplus
Here is the twist: unlike the cost of chocolate, the cost of providing these pensions has actually dropped since those "disastrous" post-crisis recalculations. And the lower pensions now due to be paid are a significant factor in those reduced liability costs.
The actions taken: sponsors deficit contributions, increased member contributions and the accrual changes—combined with economic hiccups along the way—mean that many schemes are now showing large surpluses and are starting to consider to whom that surplus belongs. This question arises both if they intend to run on or to transfer the pension to an insurer or superfund.
