We now know that we are unlikely to get a national pay rise for the rest of the decade. We are worse off in terms of wages than we were ten years ago. What we get paid matters and with millions of us likely to get lower take homes as a result of auto-enrolment, the cost of pensions is likely to be a matter of fierce public debate in the next three years
Last week, the PLSA published some interesting numbers coming out of their annual survey of members (available to members for £2,000+vat and non members at £20,000 +vat- there’s value in membership!).
According to the press release
Since 2015, the mean running cost of DB schemes has increased by 37 per cent from £400 to £546 a member….
This is largely driven by increases in fund management and custody costs, which are up 32 per cent over the past year.
Smaller schemes – those with 5,000 or fewer members – have seen the greatest increase in running costs with an average increase of 63 per cent, to £787 a member.
Some pension schemes do better than others. The British Steel Pension Scheme is rumoured to have per capita costs of £62 (and to have won awards for its efficiency). Some schemes seem to be disproportionately expensive. Much of the attack on investment consultants in the FCA’s recent Market Study focusses on consultant’s failure to manage their own costs and the costs of asset management to pension scheme trustees.
For the PLSA, this is fuel to their argument to bring small schemes into big schemes but the PLSA stop short of explicitly criticising the pension industry for cost over-runs. To do that would be to point the finger at the asset managers and consultants who create the bulk of the cost. Instead , the PLSA’s solution is to dismantle the infrastructure that supports small schemes, almost certainly at the expense of member benefits.
It is odd that to better understand this , we need to pay the PLSA a multi-thousand pound bill.
All this may seem of little interest to the ordinary person but it should be!
In America, where disclosure of pension costs is high on the corporate agenda, the impact of total costs from the pension are directly link to salary growth (or the lack of it).
Here is an article in the Wall Street Journal that explicitly discusses the impact of pension provision on wages (thanks Per Andelius for finding it for me)
For public-sector employees with defined-benefit retirement plans, the future is devouring the present.
The share of compensation costs paid by state and local governments for defined-benefit plans reached 10%, its highest on record, in September 2016, according a report this week from the Labor Department. That’s up from 9.5% in 2015, and 6.3% in the same quarter a decade ago.
The quarterly release, Employer Costs for Employee Compensation, tracks how much employers from a variety of sectors and industries pay for categories including wages and salaries, paid leave and health insurance, and retirement and savings contributions…….
For state and local workers, the larger share going to defined-benefit costs comes at the expense of other forms of compensation. In the same period 10 years ago, wages and salaries made up 67.3% of compensation. As of September this year, that had dropped four percentage points to 63.3%…..
In the private sector, where workers are more likely to have a defined-contribution plan, the shift has been less dramatic. Wages and salaries made up 69.8% of compensation as of September, down less than a percentage point from a decade ago. In other words, as a share of total compensation, private-sector workers get to bring home more or less as much as they did a decade ago.
The average cost to an employer for an hour worked in September was $34.15, the Labor Department report said. Wages and salaries made up, on average, 68.6% of overall compensation costs, or $23.42. Private-industry workers averaged $32.27 in employer costs per hour worked, and state and local government workers $45.93.
The article’s title could not have been more explicit
State and Local Workers’ Pensions Eat Into Their Paychecks
The FCA should take note. If it wants popular support for its attack on asset management costs and consultancy fees and inaction, it is going to have to make explicit, the link between pension costs and wages.
That might mean upsetting people, including those in the public sector for whom pension entitlements seem to be considered independent of overall remuneration.
With public awareness of these things will come a greater appreciation of benefits. That should be good for everyone – especially the PLSA.
Pensions aren’t cheap and their costs fall on all stakeholders, management, shareholders, customers and employees. If we want a competitive post Brexit Britain , we need competitive pension management costs.
That is why we must take the FCA’s Asset Management Study seriously and why the debate about competition and transparency must continue to be escalated.