Implications of the Transition from Defined Benefit to Defined Contribution Pensions in the UK

This box discusses the ongoing shift in the UK funded occupational pension landscape from Defined Benefit (DB) to Defined Contribution (DC) schemes, which carries significant implications for financial markets and the broader UK macroeconomic environment. Within the cyclical horizon, this transition is anticipated to result in a decline in real pension savings and a redirection of capital away from domestic use. The financial repercussions extend to funding pressures on the UK central government and to corporate sectors involved with infrastructure, such as utilities and housing. Additionally, it makes long-term interest rates more volatile and fosters a procyclical relationship with sterling. The key macroeconomic repercussion is an erosion of resources and willingness to invest domestically, from both private and public sources.

Recent policy attempts to induce domestic investment from private pension funds are well intentioned. The bigger opportunity for the UK Government to nurture investment lays with  occupational pensions in the public sector.