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Seems a stupid question to those of us involved in running defined benefit schemes. Pensioners of defined benefit pension schemes are the happy beneficiaries of their companies foresight and generosity in establishing and maintaining that pension. Organisations that have established defined benefit pensions know only too well that the open liabilities their current and future pensioners present are one of the primary risks the organisation will face over the decades to come. Boy are companies bothered about their defined benefit pensioners!
The same does not seem to be the case with regards to staff retiring from defined contribution pension plans. According to PICA only 33% of those in personal pensions take even the first steps to shop around for the best pension on the market. Even more disgraceful is that only 25% of people with defined contribution pensions looked after by occupational trustees take this first step.
To what can we attribute this staggering lack of financial prudence?
Some will argue a conspiracy theory from the insurers to ensure annuity rates are soft.
Some will argue that trustees are not properly trained to understand the issues
Some will argue that companies have no incentive to spend money on a life-event that falls , by definition, outside the period of their staff’s employment.
What has gone wrong that we have so lost the plot? The defined benefit and defined contribution plans set up by companies were set up to offer reasonable retirements to staff in turn for their loyalty and hard work. Pensions were never meant to be a millstone around a company’s neck, they were designed to enhance their reputations as organisations that one would want to work for and work for, for some time.
I am writing a report for my companies customers for whom we are looking to give an “at retirement” service for their staff.
That in justifying investing in this service we had to look in depth at its business justification is a scandal. It is sad that purely in commercial terms, our justification had to rely on the recent abolition of the normal retirement age to get this issue on company’s agenda at all.
Put another way, it is only because companies are seriously worried that they cannot retire out their staff at a normal retirement date , that they are getting concerned about the outcomes of the DC pensions they have paid so much into. Surely this must be wrong!
The good news is that there is a huge amount a company can do for its staff, trustees can do for their members.
They can make sure that 100% of their retirees are health screened to make sure that they are not missing out on the better pensions you can get if you are not in perfect health, live in the wrong postcode or have a family history of poor mortality.
They can make sure that staff are aware not just of the need to shop around but how to shop around, how to assess other retirement options including fixed term annuities and the various types of drawdown.
The really good news is that any cost benefit analysis will show that putting money into “at retirement” planning for retiring staff will show it has the highest ROI of any employee benefit.
The even better news is that happy pensioners are the greatest ambassadors organisations can have. They are the referral points for new hires, current employees and existing and prospective customers.
Pensioners are part of the shaping of a company’s brand.
Should organisations be bothered about their pensioners? Yes they should, and if yours isn’t, isn’t it time you looked at you’re “at retirement” policy for your older employees.
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Hi Henry.
You are spot on!
Entrepreneurs as a group are financially literate in terms of their need to accummulate capital including aasufficient sum of capital for 30 – 40 years of retirement. Employees as a demographic group do not have the same instincts. Corporations have the human resources to offer a solution through DB plans.
Speaking for the Canadian market my generation (boomers) corporations secured long term employees and the growth which followed for the last 50 years through the use of DB plans. What has changed is not the value of DB plans to corporations but rather the quality of leaderhip and the value propostion CEO’s bring to a corporation. Ask Jack Welch whether he or she believes in DB plans. Ask any CEO why his or her retirement is worthy of a corporarion’s resources and a the needs of employees are not.
Beware the emerging markets of China, Índia and Brazil. They will secure our best and our brightest. What we do with DB plans will become a moot decision.
Respectfully.
Dan Zwicker
Jack Welch – typo – ‘he’
r
Jack Welch – typo – ‘he’
Some comments are better prepared on a PC rathe than on a BB. However, the subject is one in which I am passionate and I’ll be awhile bfore I get bac kto
Cont’d. – back to my PC.
My apologies.
Dan.
http://dan-zwicker.blogspot.com/2011/05/canadians-lag-in-financial-planning.html
Now that I am back at my PC here is my take on the issue.
DB plans were the key source of financial retiremrnt ploanning for those who had them.
As DB plans began being phased out (for the past 20 years)Canadians were on their own with regard to the financial retirement planning necessary to achieve a sustainable 30 – 40 year retirement income.
The management skill and corporate financial strength which underpin the guarantees in DB plans have been replaced by individual financial advisors. Advisors have no means to guarantee retirement results except for insured financial instruments (e.g. annuities). In a free market there is no problem. In a socially responsible market there are substantial issues.
Public servants who opt for a career in the public service have their retirement benefits front and centre aside from any other professional motivation to become a public servant.
The outcome will be marker for our contemporary socio economic values.
In Canada, today 75% of all Canadians are oon their own
Now that I am back at my PC here is my take on the issue.
DB plans were the key source of financial retiremrnt planning for those who had them.
As DB plans began being phased out (for the past 20 years) Canadians were on their own with regard to the financial retirement planning necessary to achieve a sustainable 30 – 40 year retirement income.
The management skill and corporate financial strength which underpin the guarantees in DB plans have been replaced by individual financial advisors. Advisors have no means to guarantee retirement results except for insured financial instruments (e.g. annuities). In a free market there is no problem. In a socially responsible market there are substantial issues.
Public servants who opt for a career in the public service have their retirement benefits front and centre aside from any other professional motivation to become a public servant.
The outcome will be marker for our contemporary socio economic values.
In Canada, today 75% of all Canadians are on their own.
Henry – I agree and think I can offer some explanation (not excuses).
Companies took flight from DB and dived into DC – risk transferred – end of story – or so they thought. In reality it is not that simple and it has taken quite a while for sponsors to realise that. Tey are now waking up to it, as are Trustees (but both are still to some extent blinded by the headlights of DB defecits).
DC pots were tiny they are now growing slowly but are still relatively small (most in our scheme are << £100,000). Indeed we have quite a few <£10k where it has to get an OMO. As they grow the need to choose the best annuity (or alternative) increases. We have had DC in our scheme for 11 years but only had an annuity broking service for about 4 years – we realised the issue was developing and addressed it.
What is now focussing sponsors' minds is the abolition of the concept of compulsory retirement. They now realsie that if they expect staf to retire they must be able to afford to retire. This will in time have two effects:
– contribution levels will edge up or at least members wil get access to advice on their needs to enable them to recognise that most members need to make AVCs (currently most assume that, as in DB, the default contribution is automatically enough); and
– maximising the benefot from the accumulated pot is important and providing advice / annuity broking is a simple (and relatively cheap) way of helping staff to retire.
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