I have a lot of respect for Towers Watson. They may be big but they have kept their integrity through their expansion and the people who work for them demonstrate a focus on their customers and an intellectual integrity that means they are rarely conflicted (the curse of the intermediary).
In 1998, Roger Urwin, their then Head of Investments gave a talk where he explained the fundamental flaw with DC was in the inefficiency of the decumulation phase (relative to DB plans where decumulation is simply a mirror to the accumulation. What he said then remains true today, his arguments have been validated by time and by the markets which have moved from the benign (for funded pensions) world of high returns and high interest rates to the toxic combination of QE depressed interest rates and low nominal market returns.
I have always considered this observation the most important contribution made by a consultant to the DC/DB debate. Towers Watson are entitled to be considered for Roger’s work and those who have followed him, the thought leaders of DC and anything they publish on the subject of DC outcomes needs to be taken seriously.
Yesterday they came out with a press release which I’m re-publishing in full.
Adequate retirement income not a priority for employers
Most employers’ objective for providing a defined contribution pension plan is to ensure the employer competes in the market, rather than to ensure their employees have an adequate income in retirement, according to Towers Watson’s DC Pension Strategy survey.
Only 15 per cent of the UK employers surveyed said their objective for providing a defined contribution (DC) pension plan is to ensure their workers save for an adequate retirement income. Some 65 per cent said market competitive provision was the main objective to offer a DC pension. A small 6 per cent mentioned their objective was to comply with legislation.
Nonetheless, 42 per cent of employers believe their DC plan is currently helping employees to retire. And a quarter think their plan currently ensures their employees have an adequate income in retirement.
Will Aitken, senior DC consultant at Towers Watson said: “At the current time, many employers have focused on what goes into DC – market competitive contributions, rather than what comes out – adequate pensions. The underlying message seems to be that, like mortgages, employees need to take ownership of their own finances. Of course, the question is whether employees see it the same way.”
The survey uncovered some striking differences in the effectiveness of DC schemes against defined benefits (DB). While 86 per cent of employers felt that DB helps retain employees, and 80 per cent believe DB ensures employees have adequate retirement income, for DC, those figures fall to just 22 per cent in both cases. That’s a remarkable difference – DC is proving an inadequate replacement for some of the best aspects of DB.
Will Aitken said: “Employers need to decide what they want their DC scheme to be, beyond not being DB. Up till now, DC has done a great job of not being DB and can no doubt continue to do so. But given the huge sums of money entering DC schemes, we’re seeing a desire to do better than ‘not DB’.”
Despite only a small number of employers setting the objective for their DC pension to provide an adequate retirement income, almost three-quarters (71 per cent) believe it is the role of the employer to offer services to help their employees as they reach retirement. Some 79 per cent believe employers should ensure their DC plan is tailored to meet their employees’ needs.
More than half of employers are not worried about being stuck with staff that isn’t able to retire. Some 58 per cent think their typical employee would still be able at the age of 65. Around a third (38 per cent) say it is more likely their workers can retire between 66 and 70. Only a small 3 per cent believe their employees will have to work until the age of 75 before they can afford to retire.
Will Aitken said: “Employers do believe they have a role in enabling their staff to retire. That’s not quite the same thing as ensuring their staff will be able to retire. DC is often about providing employees with a framework that offers the possibility of an adequate retirement, rather than the likelihood. As we see the workforce age, we may see employers going further to increase the likelihood of those possibilities – to ensure that they are not left with unwilling employees who can’t afford to retire.”
And do employees get this?
It would be really helpful to see a parallel piece of research which asks questions of the employees of these companies.
- Do they see their employers as helping them on their way or as a comprehensive insurance against retirement poverty?
- Do they see their employers offering a pension to be compliant, to compete in the jobs market or to provide them with a way out of work?
- Do they see a need for their employer to go “beyond DC” and focus more on retirement incomes or are they happy with what they’re getting?
How relevant is this survey to smaller UK employers?
Any sample of 126 employers is too small be statistically significant relative to the 1.25m employers who the DWP reckon will stage auto-enrolment. However, the Pension Regulator recently announced that though we have staged auto enrolment for around 1% of employers, we have enrolled around a third of the staff who auto-enrolment will initially be offered to. These are mega-employers who Towers Watson know as clients. I would be surprised if many (if any) are public sector.
So while these 126 companies are only 1/10,000 of the employers, they are very influential on Government thinking, on thinking within pensions and rewards circles and on the national economy.
Are they representative of employers – in some ways I doubt it? The quoted figure of only 3% of the 126 offering a pension scheme to be compliant is unrepresentative of all employers (not least because if you just wanted to be compliant, you wouldn’t want Towers Watson’s excellence). Nevertheless, I suspect that most employers are more concerned about recruitment, retention and at retirement outcomes than is currently supposed (at least by those who claim auto-enrolment is “not about pensions”).
Are there lessons here for smaller firms and their advisers?
I think there are. The questions relating to paternalism (do we give a leg-up or hand-out) – are as relevant to small as big employers as are the long-term issues of how you manage employers out of work when their productivity reduces in older age. It is concerning that these are not the questions that advisers are discussing with SMEs. The focus of the financial services industry is instead on the gravity of tPR fines for non-compliance with the minutiae of auto-enrolment legislation.
It is a pleasure to read the results of a piece of work that focussed on the big picture- what employers are doing pensions for – and for that – for the integrity of the work and for the intelligence and clarity of Will’s comments, we should be grateful.
For me- the lesson is that there is more for us to do to emphasise that it’s the outcomes of the pensions that matter more than the short-term compliance with regulation.
I have one question for Will- one that I have put on Twitter and will repeat here to you!
What are you going to do about it?
This post was first published in www.pensionplaypen.com/topthinking