Employers pay pensions – don’t they?
It’s baked into the DNA of Government social policy that a part of the welfare system is managed by employers prepared to fund an employee benefit that provides a certain income in retirement.
So much so, that in recent meetings in Whitehall with Government policy-makers, it was taken as read that employers would look to embrace the upcoming pension freedoms and pay people pensions not just as a result of a defined benefit promise, but from any defined contribution pots that had been built up.
As I have said a number of times on this blog, most employers have no intention of establishing the drawdown mechanisms, let alone paying non-guaranteed scheme pensions from DC monies, in fact they are looking for maximum separation from responsibility for DC outcomes.
As one pension officer said to me this week “we’ve had our share of risk”.
We cannot employers from throwing in the towel. Again and again they have been dumped on and the remaining incentives to run schemes do not outweigh the commercial imperative of managing the business for the interests of all stakeholders.
Paying pensions is no longer part of the deal and if employers could attach a transfer value to all retirement statements and discharge their liabilities by means of a lump sum, many would. Indeed many are trying to do just that.
Transferring pension risk to staff is not “risk-free”!
An employer, and an employer’s trustees, have access to good quality pension advice provided by independent consultants and delivered professionally. Here for instance is a briefing note issued to employers on the pension freedoms
From 6 April 2015 those with defined contribution (DC) pension savings will have greater flexibility and will be able to access their funds in a number of ways.
The new rules may also impact how those with defined benefit (DB) pensions will seek to take their benefits at retirement. Trustees and sponsors of all workplace pensions should decide how the new flexibilities will be reflected within their pension arrangements and how best to communicate these changes to their members.
Employers also need to consider whether the Government’s ‘guidance guarantee’ will be sufficient to enable members to reach adequate decisions, or if this should be supported by scheme-specific education programmes for members reaching retirement.
Defined Benefit schemes
Amongst other things, trustees and sponsors of DB schemes should decide:
- Do the scheme rules need to be updated to reflect the new limits for trivial commutation and small lump sums.
- Which, if any, of the new options should be offered within the scheme to members with money purchase pots.
- Whether the provision of Transfer Value quotations should become part of the retirement process and if so, to what extent the requirement for members to have taken independent financial advice should be supported.
Defined Contribution schemes (trust-based)
Trustees and sponsors of DC schemes should decide:
- If the new options should be incorporated within the scheme. For example, members could be given the option of taking their entire pension pot as a one-off lump sum.
- Whether the default investment strategy should be reviewed in light of the changes. Group Personal Pension Plans / contract-based arrangements
Sponsors of contract based pension arrangements should consider:
• Whether the default investment strategy should be reviewed in light of the changes.
The implications of the new rules are wide-ranging and should be discussed with your First Actuarial consultant as soon as possible. First Actuarial can:
- Help trustees and sponsors understand the implications of the options available.
- Design suitable member communications to reflect the strategy that is adopted.
- Assist with a review of the investment strategy for the scheme.
- Provide financial education sessions to support members in their retirement planning.
It’s the last point that is perhaps the most interesting. It suggests that an employer should engage, educate and empower staff to take sensible decisions for themselves.
In offering financial education, an employer is sharing the information they have , with the people who will be taking on the risk. This seems an obvious thing to do.
The provision of education may in itself not be enough – education may encourage formal advice from a professional adviser, just as sixth form colleges encourage higher education.
But what should people actually do with their money?
There’s only so much time , energy and money people will spend on financial planning. People want answers to the simple question – what should I do.
Put simply, there are more questions than answers. Many of the mechanisms to unlock the pension freedoms are still to be built. People may want their money now but decisions taken in haste, can be repented at leisure.
As I have mentioned repeatedly, frustration that leads to people cashing out pension pots, could be extremely destructive. People will find the money they have liberated reduced by tax and they will struggle to reinvest with the same efficiency as had they kept money where it was.
With a potential £6bn of new money available to the over 55s in two months time, worse predators than the tax-man will be swimming around. The sharks who prey on the ill-educated and easily led, will undoubtedly be liberating pension cash into a multiplicity of plausible scams.
Frustration and short-term expediency are the enemy
But this frustration will increase unless we come up with new products that enable people to manage their retirement monies more efficiently.
“Wait and see..” may work for now
For employers preparing for the new world after April 2015, the best that can be done is to protect staff from their worst instincts and wait until new solutions appear.
The cost of employing financial experts who act with integrity and advise with independence is relatively small relative to the cost of employees making foolish decisions.
But the wait must be rewarded
I hope that within a year, we will see new options emerging, some using the existing framework of DC and DB rules and some using the new DA pensions such as CDC.
They have not appeared to date and until they do, employers should keep their staff informed, help them to avoid disastrous decisions and prepare them for the years ahead when investments , not work, will be their primary means of getting paid.