We never had it so good

Two things have happened in the past few days which will change the way sponsors think about funding their staff’s pensions. Firstly Aon (and to a lesser degree Aviva), decided to cut the corporate contributions to their DC plans. Secondly the Government decided to close off full tax relief for the top earners.

Taken together they amount to bad news for the DC providers and particularly for those organisations establishing new “state of the art” SIPPs. They also represent a significant threat to the future of many of us ordinary mortals working in the corporate sector and relying on our DC plans for a reasonable retirement .The move by Aon can be seen partly as a reprioritisation of that’ organisation’s total reward spend, partly as a realignment of its UK reward strategy withthat  in the States and partly as a move to encourage individual responsibility for pension provision. It is likely to lead to other organisations looking at personal account contribution levels as a benchmark for employer pension provision.

In the UK, the prevailing thinking has been that the DC plan should be benchmarked to provide an equivalent benefit to the legacy DB plan. In 401k land the corporate DC contribution is benchmarked against peer group contributions and in absolute terms against no contribution at all.

I spoke, prior to the budget to a provider of SIPP services who saw Aon’s move as a positive, he saw the move as a break from false paternalism and a move towards a new “self-service, self-help” culture in which a SIPP structure could prosper. What he also mentioned was that the SIPP structure could reviatlise occupational pension provision by giving high-earners with loads of shares in their company a reason to be interested in pensions

To my mind, corporate SIPPs for all the talk of true open architecture are not about mass participation  but about creating an opportunity for share rich execs to divest their top-heavy share options into a pension with 40% tax relief on the way in and the options of draw down on the way out.  As such, they are the logical next step for UK occupational pension provision which has always been targeted at the top slice of corporate earners.

The very draconian clauses in the budget that not only introduce the elimination of higher rate tax relief for those on £150-180k pa from 2011 but also closes off increases for these people between now and then are a spanner in the works for organisations introducing these new SIPPS. The proposals effectively eliminate the opportunity for the very senior execs to pump their £100k+  in-specie sharesave contributions into the se plans (which was what everyone was getting so excited about).

This may all sound pretty inconsequential for those among us who have neither the spare dosh or the net relevant earnings to take advantage of the SIPP structures but it’s bad news for us as well.

What may result is a further diminuition in interest in corporate pensions among the decision makes in UK plc and an acceleration of the trend started by Aon to reduce corporate comittment to DC plans as the paternalistic concepts of “deferred pay” and DB equivalence receed into dim and distant history.

I am not one of the romantics who believes in the Frank Field vision of occupatioanl pension provision as a British economic miracle. Most of the old DB plans were heavily biased towards high earners at the expense of the low-paid and particularly the itinerant employee. These plans suited the well heeled white collar staff well, the majority of whom will be alive for many years to enjoy them, they were subsidised to a large extent by the abbreviated mortality of the blue collar staff – most of whom won’t.

However I am pragmatic in my view that the inequality of occupational pension provision in the DB days was better than the free for all that is 401k where account balances are tiny, decision making appalling and governance structures weak .

Ironically the DC contribution structure that prevail in corporate Britain are pretty generous by comparison with most developed countries and they are pretty democratic, especially to the short-serving low paid employees who no-longer suffer from deferred vesting, contribution offsets and the like (for which they have not been recognised).

If the price we have to pay for a half-decent pension system is the involvement of senior executives through tax perks then so be it. The savings to the exchequor of scrapping HRT for this arbitrary bunch are likely to be minimal . Taking away the ability to super-fund pensions by the income rich is likely to lead to a further reduction in corporate involvement in staff pension matters with the benchmark for future corporate pension provision being slashed to the levels of personal accounts. The long-term impact on the exchequor of inadequate pension provision is likely to be huge.

This could be the ultimate legacy of tthirteen years of pension reform under this Government.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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