There is no engineering miracle that will put Britain’s pensions back on track. Indeed many people have never been to the station. The guaranteed pensions that flourished at a time of high interest rates and commensurate growth in the stock market have proved unsustainable in their current form. While there is an argument (a good one too) that they could be revived as originally conceived, using the risk-sharing framework of defined ambition, the consensus is that we save for our retirement using a defined contribution system.
Auto-enrolment is not putting our pension system back on track, it is creating a completely different system of travel. It is considerably more inclusive than DB was but while the network is spread further , the quality of the journey and the speed to destinations is a lot slower.
Indeed , on a money-in/money-out basis, there is no possible way that our current plans for this new DC world can get us to the old destinations in anything like the time that DB did. Let’s look at the timetable.
The sneaky bit is that reference to “qualifying earnings”. These measly contributions aren’t even made against basic pay, let alone total pay. There are some who claim that the nudge contribution system is a fake and is giving people false security.
HUMANKIND CANNOT BEAR VERY MUCH REALITY (TS Eliot)
At yesterday’s launch of the PPI’s Future Book, the stern Ralph Frank hinted that it might be time to call Government and Public on the inadequacy of our current funding of DC.
By coincidence, my colleagues and I had been discussing whether to explain to colleagues at First Actuarial that the firm’s 7% contribution (against total pay) was not in itself going to get us a replacement retirement income (ever).
Is it time to tell it straight, or would the unpleasant reality do more harm than good?
The answer is in the intention
If we – that is Government , financial services and the employers are as one and want this new network to carry people to retirement destinations on time, then we know that we are going to have to put a lot more coal in the boilers of the trains than we are currently putting.
Even the 8% we are currently promising as an employer/employee promise is only against band earnings and is hopelessly short of what’s needed to provide proper replacement incomes for our workforces.
If our intention is to get there eventually , then it is a question of how fast we can drive the train. Right now , we cannot go at DB contribution rates because the DC train would fall off the tracks, derailed at every set of points. We haven’t built the new railway system to support the kind of speeds we were used to travel.
But we mustn’t pretend this won’t be hard
At my firm, where people know how fast the DB trains ran and how much coal went into the boilers, a dose of realism is healthy. People earning £50,000 should be living £40,000 lifestyles and setting aside £10,000 per annum to get a DB like retirement.
Put another way, people are looking at their payslips and believing themselves a lot richer than they really are, there is an unspoken deficit between what they are spending on their tomorrows and what they need to spend on tomorrow. That deficit is around a fifth of pay.
Like telling someone who pays rate tax, they need to pay as much again in pension tax. It is that hard!
Telling someone on £30,000 , they are really on £24,000 and the difference is the pension contribution they ought to be paying will not resonate well with anyone, but that is the truth of what pension people are saying between themselves.
Paul Johnson is right
In a recent lecture, the bare bones of which I published, Paul Johnson suggested that the gap between the DB haves and the DC havent’s was so large that perhaps we should break the promise made to the haves and shove the money into the pension pots of the havent’s.
Of course it wouldn’t be done as crudely as this, but the only way we can get those on the slow train with DC to the same places as the fast train with DB would be a radical fiscal intervention. There is no magic coal that can make the DC train catch up.
Johnson concluded that such an intervention isn’t going to happen and that generation y,z and the millenials are going to have to make their own way home using whatever fuel they can find.
We must trust in our common intention
I think I can explain this to a bunch of actuaries and pension administrators who are steeped in DB and DC numbers. But I don’t think I can explain this hard stuff just yet to the 9m new DC savers auto-enrolment is creating, or the large number of workplace savers who chose to be in under-funded DC plans before AE came along.
But these conversations need to happen and happen soon. The issue is when. If our common intention is to provide adequate pensions, then everyone has to have the same intention.
The financial services industry really must want to provide the right tools for people to save efficiently and hard.
Employers must prioritise retirement saving as part of the way they pay people
Government must patrol the auto-enrolment process to ensure no back-sliding and encourage the nation to save more.
All parties must get behind the pension system we have and stop mucking it about. We need simple thing to change right now- we need more coal in the boiler, we need DC trains to be able to go faster and we need those on the trains to have greater confidence in the journey.
The Future Book is being written, we are onto version 2, it is both the chronicle of Auto-Enrolment so far and a projection of where our DC trains will be in years ahead. Right now it tells us the railway network is half completed and the trains that are running are generally running behind the acceptable timetable. But it does not say this cannot change.
What I like best about the Future Book is that the next 20 chapters have yet to be written.
If you want to read the Future Book, press this link http://www.pensionspolicyinstitute.org.uk/publications/reports/the-future-book-unravelling-workplace-pensions,-second-edition-2016