Speaking on the radio yesterday, John Ralfe called the decision of Tata Staff to accept the loss of future accrual into a final salary scheme in exchange for a 10% contribution into a DC pension fund as “inevitable”. This blog looks back on why he ‘s currently right and questions the sense in the binary decision they were left with.
It is not my choice but were I faced with the job/no job choice when I’d worked in steel all my life, I wouldn’t have thought hard about choosing job +DC pension over no job and no future accrual into any pension.
Nor would I have thought Tata to be putting a gun to my head. They are competing globally against organisations that are not guaranteeing a percentage of final salary to its workforce as part of labour costs.
Nonetheless, knowing what I do about pensions, I would have been deeply saddened to lose future accrual into one of Britain’s best run pension schemes (Tata is reported to be managing membership at an all-in cost of £62 per head). On a pound for pound/benefit basis, the income purchased from the 10% DC contributions is unlikely to provide such value for money. There are no long-term winners in this switch from DB to DC.
I’d be saddened too for those managing what was the British Steel Pension Fund, who have done nothing wrong and plenty right.
I would not be pointing a finger of blame at Tata the company, the pension fund or the unions – but I would be asking questions as to just why steelworkers who have no history of managing their pensions, are expected to manage a DC pot through retirement.
An unusual concession.
The day to day reality for Tata steelworkers will be unchanged, working conditions, pay and immediate benefits will remain the same. What has changed is the future promise in retirement, the capacity of what are mainly manual workers, to enjoy the longest holiday of their lives.
This is an unusual concession for a worker to make, to give up future gratification in return for the right to work today.
I am not one who sees the choice as binary between DB and DC. Had we persisted with the ideas for defined ambition pensions, proposed by Steve Webb and enacted in the Pension Act 2015, we might have been able to offer future accrual of a defined ambition pension scheme which would not have involved financially empowering people having no wish to become their own pension experts.
A defined ambition scheme, operating with a targeted pension promise but using best endeavours to pay rather than guarantees, could have been set up using the excellent infrastructure of the British Steel Pension Scheme. Such an arrangement could have operated as a genuine mutual, tapping into the economies of scale of the £15bn BSPS and its administrative and actuarial resource. Accrual into such a defined ambition plan could have been based on what a defined contribution would have purchased, rather than what Tata guaranteed.
A missed opportunity
The opportunity to convert future accrual for Tata steelworkers from DB to DA was lost when Ros Altmann pulled the plug (or at least mothballed) the DA legislation in the summer of 2015.
In doing so, she consigned the unions, Tata, the BSPS and Tata Steelworkers, to a DC pension scheme. I am sure it will be a well-funded DC pension and that care will be made to give workers every available tool to manage their pension freedoms.
But I am pretty sure that most of these workers will find managing their freedoms problematic, good advice expensive and hard to find and the maintenance of cash-flows through later retirement very difficult indeed.
DC is a sub-optimal solution and Tata could have offered a more acceptable CDC type benefit, if Government had not closed down a third-way pension initiative.
The opportunity cost of “pension freedom”.
Why this blog grumbleson against the various initiatives to empower us, is because of this opportunity cost. The pension dashboard, the lifetime ISA, even Pension Wise, will have little to offer the Tata steelworkers.
They need job security first, and that (mainly through changes in the economic climate) they currently have. They need a decent post retirement promise second. What they have accrued is safe (there is no question of the BSPS going into the PPF) , but they are being asked to give up certainty for uncertainty, a managed pension for an unmanaged pot of money.
The cost of operating a CDC arrangement, appropriate for the needs of the Tata Steel workforce, could have been capped at the 10% DC rate, but the promise – an undefined scheme pension , could have offered so much more.
If there are winners here, it will be the intermediaries who will now be buzzing around Port Talbot with pension dashboards, aggregation tools, TVAS calculators and cashflow modellers. The Tata Steelworkers will be empowered to take financial decisions about their futures based on all this technology and fine words.
I wonder how many will know what they are doing, any more than they know what they have done in accepting the new conditions of work.
Of all the critics of the Defined Ambition agenda, and of CDC in particular, John was the most outspoken. I wonder, were he a Tata Steel man today, whether he’d be quite as opposed to a scheme pension paid without guarantees.