Companies count the cost of pension freedoms

target pensions

Pension freedoms are … creating a human resources burden, the CBI said, as company leaders try to ensure their older staff do not spend their pension pots early and face hanging on to their jobs when they should have retired.

“Even at this early stage it is clear that succession planning is likely to become more difficult,” the CBI said. “The challenge the pensions freedoms brings for businesses is that employees risk not being able to afford to retire if they choose to spend a significant chunk of their pension pot on reaching 55 years of age while remaining in their jobs.”

This from the CBI as reported in this morning’s FT.

The tripartite social contract between employers, the members of occupational pension schemes and the Government has been a pillar of post-war British (and European) social policy.

Put at its most brutal, members agree to work in return for jam today and jam tomorrow, employers agree to share part of the risk of an ageing workforce with the State and the State incentivises employers through tax-breaks.

Written into the contract is the maxim “don’t spend it all at once” which is why scheme pensions and annuities are designed to pay a pension for life. We now have the freedom to break that contract and the CBI know it. Far from freeing employers, the pension freedoms (who no longer have the power to impose a statutory retirement age) face the prospect of an ageing workforce sitting on their hands. Employers are tied to the whims of their staff.

The solution that the employers surveyed propose is that the Government leaves things at that and doesn’t complete the job started with the tax changes at retirement. Changing the way we receive tax relief to a flat-rate – or more radical TEE formulation where the tax relief is on the benefit, would disincentivise high-earners from saving (it is thought).

This is a little like planning a skyscraper and building a bungalow. We are in the process of changing the way the nation plans for its later years through auto-enrolment, through the pension freedoms and finally by the way we incentivise prudence in later years.

Unlike the CBI, I do not see the problem of people spending their retirement pot too early as merely a savings issue. It is a spending issue. Even were people to have saved harder and longer, those wishing to swap retirement savings for a Lamborghini lifestyle would simply be trading up in their consumption.

The surveys (principally the Aon survey) suggest that most people are worried by their money running out and the facts (very few large pots have been cashed in since April) suggest that people are sitting on their hands and waiting for a proper spending vehicle to help them plan retirement.

For most people that will not be an annuity or advised drawdown. It will be something else which targets a level of pension about which people are reasonably certain , offers greater flexibility than an annuity and does not require a retinue of advisers to make it work.

Unfortunately we have just cancelled work on the regulations that might have made such a spending vehicle possible and though the project has been “mothballed”, it is unlikely that any serious alternative legislation can be put to parliament before a pensions bill in October 2016.

In retrospect, the Defined Ambition project was too nebulous. The idea that in Steve Webb’s garden, a thousand flowers could bloom, was nice from an aesthetic viewpoint but rubbish when it came to getting buy-in from the public- most especially from the employers on whom CDC was deemed to rely.

The harsh reality is that employers are not going to share longevity risk with Government if they can help it. They have plenty of it in their DB schemes and their task right now is to reduce that risk to a point where they can get on with making widgets.

Whatever we salvage from the wreck of DA must offer the employers completing the CBI survey clear separation from its outcomes. By which I mean that DA(2.0) needs to focus on the retirement needs of those exercising pension freedoms both from privately held and trustee operated pensions. Just because the employer helped with the saving of the money does not make them on the hook for how it is spent.

The second thing that needs to emerge from DA is a clarity about what the Government is facilitating. Are they opening the door for the multiplicity of Heath Robinson designs in the DA papers or are they specifically facilitating some form of mutual risk-sharing where the later-life contract is between the plan, the Government and the member.

I think this is the only practical way forward. It is not something that has been openly discussed but it is pretty much the solution that is being established in a number of European countries and in parts of Canada. It is ambitious because it assumes that people can co-operate in a common purpose without benefits being guaranteed. There are many who see this as no more than a pipe-dream.

But if we are to move on from a debate about whether the pension freedoms are damaging or helpful, we have to consider how to spend the money that has been liberated so that the CBI and others can get on with widget- making and we can plan for our retirements with a degree of certainty.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in advice gap, dc pensions, defined ambition, defined aspiration and tagged , , , , , , . Bookmark the permalink.

Leave a Reply