I’m doing some work on the Pension Regulator’s recent paper on DC outcomes. The Regulator wants to know how we can get people relying on DC pensions for a decent retirement to get a better deal.
There are plenty of things that employers can do to make their DC pensions more efficient for their staff without much or any cost. Most companies have negotiated poor deals for their staff and need to go back to their DC provider and re-negotiate terms, If there is a commission going to an adviser they need to ask themselves whether they are getting value for money and if they aren’t they should move to a “Direct Offer” contract with the insurer. If they have an unbundled contract, they need to think long and hard on how much of the pension spend is going on separate contracts– we have a checklist of over 20 fundamental inefficiencies that need to be addressed before a company can confidently say to their staff
“we have done all we reasonably can to make your pension as efficient as possible”.
“Reasonably”. Even if a company has negotiated provider charges to a minimum , instigated a proper “at retirement” broking service and established sensible default and core investment strategies, they are still walking away from one historic obligation – the insurance of longevity.
Since the premium an individual pays to provide such insurance for themselves is some 25% of the resulting pension, one would have thought that this disclosure would be of considerable interest to those being required to pay it.
If the company sponsoring the DC arrangement has a DB plan it has the option, trustees permitting, to buy back these DC pots at retirement and pay members scheme pensions considerably more efficiently than the individual’s annuity provider can afford to do. I do not know of any DB schemes that still accept “transfers in” at retirement (there are still options to exchange money purchase AVCs either for cash or pension – amounting to the same thing).
The company’s point is that it is simply not reasonable for them to take the longevity strain of these DC pensions. I can understand why – there is nothing in a widget manufacturers constitution that states that it should act as a life insurer. Nevertheless, in running a DB scheme with a pensioner payroll, that’s what widget manufacturers have done these past fifty years.
The point at which companies decide to close their DB schemes for new hires or more drastically, future accrual, is the point at which affected employees should be made aware that in future they have a new job – they are in charge of their own retirement.
In using the phrase “new job”, I do not feel I am exaggerating. Many of us are likely to spend as long in retirement as we did at work, certainly if we take the at retirement fulcrum as 65. The impact of taking an enforced 25% pay-cut for the second half of my adult life is not one I am particularly relishing. But that is the message.
We have done all we reasonably can but regret to inform you that by abandoning our policy of insuring your old age, we have just given you a 25% pay-cut for the rest of your life.
Well that’s the ridiculous notion I’m talking about! But it’s the truth!
Now by way of a coda, I will set out my stall on what I think companies should be doing to make sure their staff are properly educated on retirement matters.
They should assemble their staff and explain a few home truths. Instead of shilly-shallying around talking about investment options and the like, they should explain that the DC scheme they have set up is likely to be hopelessly inadequate in replacing the income their staff were used to while in employment. They should explain that they have done all they reasonably can do but that still leaves the majority of staff with inefficient at retirement options about which they can now do very little.
They should explain the consequences of DB closure.
They should point out that the majority of staff should prepare themselves for a radically less wealthy retirement than they might previously have supposed and short of these staff reorganising their finances to make pensions a major priority, they should be preparing themselves for enforced austerity in old age.
I suggest that such an approach would lead to considerable workplace unrest, maybe some short-term disruption to production as staff engaged with the radical concept that somebody was actually telling them some home truths and wasn’t trying to sell them the value of their employee benefit program/pension policy.
However, it would lead to the kind of engagement between staff and retirement that is needed if we are to move forward from the current deadlock of distrust.
- The State can take longevity risk. (henrytapper.com)
- What really matters -DC outcomes (henrytapper.com)
- A definitive solution to the annuity crisis. (henrytapper.com)
- Final salary pension changes (lv.com)
- It’s not just about costs (economist.com)
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