Next Monday (March 6th) the Pension Play Pen will be asking itself this question at its monthly lunch (12.30- partners room, Counting House Cornhill). I am in India and have spent the early hours of this morning tramping the hills of Rajasthan in search of a Bengal tiger, we found a tiger who was upsetting some antelope and I hope that the lunch can find some life in our defined benefit pension schemes.
For while it is one thing to kill a pension scheme or a tiger, it is another to find productive use for them. Tigers – all 66 of them in the hills we visited bring prosperity to the local villages. Driver, guides and wardens find employment, hotels have sprung up, the local railway station is adorned with tigers wherever you look.
But it was not until numbers had fallen to an almost unsustainable level that people stopped shooting them and started treasuring them. I fear we haven’t reached this point in the DB cycle; the question is how much more damage we can do to their population before we treasure them.
The Green Paper sort of asks this question , but does so in such non-partisan terms, that it has been interpreted as a DB tiger-hunt. It asks one big question – “can we afford to pay our DB promise in full” and it arrives at no answer. The answer is of course blowing in the wind (of corporate priorities).
Were DB to perish then there would be plenty of predators picking at its carcass and the feast could last a few years. But to bring defined benefit schemes back, once we have closed this current generation to future accrual will require the kind of national will not seen since Barbara Castle introduced SERPS or possibly since Beveridge launched what we call today the Welfare State.
Steve Bee has been writing a lot about the death of pensions, I don’t have the will to read what he is saying as his observations seem to confirm that Steve has been remarkably prescient, he has seen the demise of DB coming and is not afraid to remind us he is the Pensions Guru.
The question for Steve , as for the people of Rajasthan, is whether life would be better without pensions (or indeed tigers). I think it almost impossible to suppose people won’t need a source of regular income in retirement or that they will be satisfied with the small beer which is the state pension.
Nor can I see our DC plans, as we are currently organising them, becoming pensions in time. They are becoming capital reservoirs to be sluiced but they are not pensions.
So I wish the Pension Playpen lunchers as much joy as I had in discovering a tiger walking across a path not 10 yards from me. Sometimes, what you are looking for turns up right under your nose!
Henry, sadly I am otherwise engaged on the 6th as I would like to have been a party to this discussion, as you might have guessed.
My two pennyworth is that DB has certainly been wounded, possibly mortally, but is not dead as yet. You would think that the Pensions Industry would have been happy to see DB succeed, after all it is part of the Industry, but my concern is that the wounding has actually been carried out by that same Pensions Industry itself, almost certainly because there is far more profit in DC-type arrangements than there is in DB. If DB is allowed to die, what aspect of DC will the industry kill next?
As an industry, Pensions needs to get back to sensible way of evaluating DB (I don’t need to tell you that!) and having done that, promote DB with the same vigour that they promote the various styles of DC and pensions freedoms (the next miss-selling scandal, not that anyone will ever admit it, even after it has happened!) Because DB offers something that DC etc cannot – certainty. Certainty is so important, because when you reach the age when supplementing your meagre pension by working is no longer an option, the certainty that DB gives you will suddenly become the holy grail and you will realise that without it, you have been conned!
There is another point about pensions or at least about a poor pension that you cannot afford to live on, which people seem to ignore. The longer older people have to continue working in order to gain a living pension, the less jobs there are available for young people. So, by saving on pensions payments, we end up paying more tax in order to fund benefits for the unemployed youngsters. And please don’t tell me there are more people working than ever before, there are more people on zero-hours contracts than were unemployed when Thatcher won a general election with the slogan “Labour isn’t working”!
Enjoy India, if you are still there.
I (respectfully) disagree – DB scheme provision wasn’t wounded by the Pensions Industry, but by the fallout following Robert Maxwell robbing the MGN Pension Scheme.
One effect of that was to ensure that DB liabilities are shown in an Employers accounts as a liability ( under FRS 17, superseded by FRS 102). With the combination of low interest rates and the annoying habit of members continually living longer than expected, the size of that liability increases.
So the obvious thing to do, if that liability is getting out of hand, is to wind the scheme up.
Except doing that would trigger a debt on the employer (under section 75 of the Pensions Act 1995). In other words, there is no way out for scheme sponsors except to reduce accrual rate – maybe a switch to Career Average Revalued Earnings; weakening the revaluation and indexation basis or closing the scheme to new joiners. Which increases the funding rate…
The industry has had very little impact when you compare it to these matters.