How defined is your benefit?



Stand on the cliff-edge and CDC

Today the Pension Institute, those “left-leaning losers” who shaped the Labour manifesto before the last election, will publish an uncompromising paper setting out the state of our defined benefit pensions, especially those supported by private sector “promises to pay”.

You can read the report, entitled “The greatest good for the greatest number” here .

left leaning.

My characterisation of the PI is of course grossly unfair, but that’s how those in the Treasury look at people who tell it as they see it , and see the plight of those not able to manage their finances on fancy fund platforms with the help of wealth managers or robo-advice. The PI stand up for that substantial part of the population who have worked consistently for organisations that took it as part of their social purpose to guarantee retirement benefits proportionate to the contribution they made to that organisation,

Well the word “guarantee” is wrong. The original promise was made on a “we’ll do our best to” basis, when that meant that the employer would genuinely use its best endeavours. Since those promises were made, the simple business of putting money aside to meet the obligation has turned into a trillion pound industry employing actuaries, lawyers, investment consultants, fund managers, derivative traders and uncle Tom Cobley – all intent on helping those promises be met.

Somewhere those promises got turned into guarantees, somewhere best endeavours became obligations. Social purpose became an accounting obligation which took priority over any other purpose of the company. In a recent report by Alan and Gina Miller, paying pensions was cited as a principal reason why one in five charities cannot distribute more than 50% of donations received – to charity!

Paying pensions – a handicap to growth?


The impact of these defined benefit schemes is considered (within Government) as a handicap to growth. Our traditional companies are globally uncompetitive, are unable to invest in research and development and cannot properly pay their taxes because they have to pay the old codgers who worked for them a million moons ago.

“Shame on defined benefit schemes”

“Defined Benefits schemes are part of the economic malaise brought about by selfish baby boomers lining their nests at the expense of the rest of us- shame on everyone but us.”

I hear the Whitehall whispers, though those whispers never stretch as far as the civil service scheme of which most of the whisperers are beneficiaries.

Not much “new in the news” that 1000 pension schemes are bust

And there we have it. The Pension Institute’s paper concludes that 1,000 of our DB schemes have “unmanageable financial stresses”, 600 will never pay full pensions and the remainder are in such trouble they will drag their sponsoring employer under with them,

If you think this fanciful, then it’s little more than the Government is already admitting. These schemes, with combined liabilities of £45 bn represent about 15% of those potentially eligible for compensation from our pension protection fund. Since the PPF already estimates two thirds of these schemes are “at risk” , the news is only that there are more schemes in trouble that the Government are owning up to. Which is worse news than thought, but most on the inside knew about this Treasury low-siding. So the report is saying what “oft was thought, but ne’er so well expressed”.

What’s new is the threat of going Dutch

What is new, especially from a bunch of leftie losers, is a realism about what can be done about it. The report is critical of the Government’s current solution , which is “to kick the pension deficit down the road a few years”, presumably till we have another Government.

Instead, the report looks at the impact of introducing “conditional indexation” to schemes which are so hopelessly underfunded and/or have such weak covenants as to be basket cases. Conditional indexation – spelt out in everyday language , means employers only have to fund for pension increases if they have to , employers could be let-off  increasing pensions in line with an index – the consumer price index – if they really couldn’t cope.

This of course is what happens elsewhere, especially in the Netherlands, where many defined benefit schemes have only paid level pensions for a few years since the crash and some have actually cut nominal pay-outs. While this has not gone down well, there has not been rioting on the streets of Amsterdam and many schemes  that might have gone bust, have stayed solvent.

In the UK, we have – so far – managed the defined benefit pension crisis, very skilfully. This is because most of the best minds (and salaries) in Government have been directed at managing solvency. The most innovative work in pensions has been focussed on keeping companies like Kodak in existence to pay their pensioners. We have not had to resort to “conditional indexation” where everyone suffers. The system we operate, which impacts the pension rich and leaves the pension poor alone, has worked.

That said, the can is still kicking down the road. I look forward to tootling up to the Cass business school to hear Debbie and David read the runes, in a few minutes time. Calling them lefty losers is of course my little joke. They are looking at a tough problem and asking some tough questions. Whether they are right is not a matter I can tell- I’ll leave it to my betters like Andrew Young , Alan Rubenstein and our pension minister to decide on that.

But I’m glad we’re having the discussion


left leaning loser? Debbie Harrison of the PI


Left leaning loser? – David Blake of the PI

About henry tapper

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