A promise or a guarantee?


Dail Mail Annuity


I have just read Tim Cox’s open letter to Steve Webb which can be found here.

Tim takes the DWP to task for seeking to introduce retrospective legislation that will create a huge burden on employers with relatively little benefits to members involved. The minister has replied with a “hold on to your hat” response and the sorry saga looks like dragging on for many a moon to come.

There are two DWPs as there are two faces to the pension industry. Like Janus, the two-faced God who looked back to the past and forward to the future (giving his name to January), the DWP is both progressive and regressive.

Steve Webb’s response, (probably written by Sir Humphrey), is full of sentient nonsense more worthy of Polonius than Hamlet. It is hard to imagine  the bright sensible Steve Webb we see on the podium could have had anything to do with it. In as much as he must represent the DWP, there are two faces to Steve Webb, but I don’t hold that against him – he has a lot of civil servants and lawyers to deal with and he can’t fight every fight.

But this Money Purchase Consultation is one of the silliest things I have seen. It is entirely regressive and serves nobody’s interest sae those obsessed with guarantees and abhorring “promises”. The Money Purchase Consultation seeks to crystallise promises made by employers into guarantees enforceable by law.

There is a big problem about the DWP’s obsession with re-defining promises as guarantees. It is this.

The moment that a promise is enshrined in the casket of a guarantee, it is lost as a living thing. Let me give as an example the pension promises made to the employees of German companies – the Mittelstand . The promises made to the employees of these companies are predicated on the employers being around to pay them. While the employers buy insurance against the collapse of their company, the employees are comfortable knowing that their employer will promise to pay them after they stop working.

The promise made to the German worker is a living promise;

  1. Staff co-operate with management to make the company strong and profitable
  2. The company uses the cash flows that would otherwise have been paid to fund managers to invest in its business (in a long-term way)
  3. The frictional costs of running a pension system are kept to a minimum.

This hugely efficient system of promises is at the other extreme to the massive apparatus of intermediated services that surrounds our funded pensions. It is so lean because there are so few intermediaries.

And if we need any proof that the system work, we need look no further than the Midelstand’s standing among global economists.

What could be a greater antithesis to the simplicity and elegance of the German “book-reserve” system, than the arguments at the DWP about whether companies now need to guarantee the complex underpins put in place (by intermediaries ) decades ago, to provide greater certainty to employers?

What could be further from the noble aims of Derek Benstead, Con Keating, Kevin Wesbroom, Andrew Young and those who wish to restore a pre 1987 order to defined benefit and some sense of sanity to its bastard child defined contribution?

The DWP and its lawyers will use “Bridge” and “KPMG” to demonstrate their its aversion. The Pension Regulator will be called in to enforce and the usual threats of European sanctions will be wheeled out to keep the heretics quiet. Not only will they kill the promise, they will go some way to killing pensions and with it the progressive agenda of AE and DA.

“Career threatening” was how one actuary described the prospect of supporting  a system based on “promises”. For one thing that “guarantees” do guarantee, is the opportunity for actuarial firms to recalculate the liabilities to the scheme. That’s good ongoing work for firms like mine. The liabilities will be set against the corporate balanced sheet so that  sponsoring employers will be turned not into a world-beating power house of productivity, but into a sub-scale insurance companies.

All this will occasion further work administrators who will need to do to re-test every record  and every payment and further work for credit agencies who will have to assess all covenants as what were thought DC schemes now become DB and need to pay levies to the PPF.

These cost , outlined eloquently by Tim Cox create additional burdens on trustees and can only be paid for by sponsors that would otherwise have been able to invest in research, machinery and jobs.

Tim Cox is right and so is his firm Eversheds. The promises that have been made in all the underpins that have been promised were made based on the best endeavours of the companies that offered them, not as guarantees.

For the Government to seek to put them in the casket and enshrine these promises as guarantees is against all good sense.

And here is the final and most important argument of all. Companies have only so much good intent to look after their staff in retirement. That good intent is being drawn upon as the DWP implements auto-enrolment. That it should seek to burden those companies with the red-tape promised by the Money Purchase Consultation, at this very time, is grand folly.

If Steve Webb wants DA he must take away not increase the guarantees in occupational pension schemes and he must allow DC benefits to be paid as non-guaranteed scheme pensions.

If Steve Webb wants AE to work, he should stop turning promises into guarantees and burdening employers with unforeseen liabilities and huge consultative and administrative costs.

And if Steve Webb wants to carry the support of British Industry and with them the Treasury then he must stop in their tracks the architects of the monstrous stupidity contained in the Money Purchase Consultation.

About henry tapper

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