One of the themes of recent conversations I’ve been having with the bosses of large companies is whether the “workplace pension” that they fund are “pensions” at all.
The recent findings of the FCA , published in the two papers CP 19-1 and CP19-5 suggest that around two thirds of people claiming on their funds aren’t taking advice and that a much higher number aren’t buying an annuity or even setting up income drawdown to pay them a replacement wage.
That the proposed remedy to the problem is to offer a triage service, is an admission that going forward – two out of the three investment pathways will not lead to anything like a pension- one is designed for people who want their pot for immediate consumption, the other as a kind of bridging financing vehicle till the state pension comes along.
It this is the scope of ambition for tomorrow’s workplace pensions, then the premise that an occupational pension will provide a replacement income to enable you to stop work is a misconception.
Large employers are not stupid. They have known for some time that unless the total funding into a DC pension is at least 15% over the lifetime of the employer, there is little or no chance of achieving anything like the DB promise from a DC pot.
But that doesn’t mean that many of our largest employers have given up. Good DC workplace schemes often offer a 10% employer contribution with a match that can take the total contribution up closer to 15 or even 20%.
But where employers are contributing this kind of money, there come a new set of problems. They are offering pension contributions not out of compliance with auto-enrolment regulations but as part of a reward strategy that implicitly links the DC occupational pension scheme with what came before.
Except what came before offered a wage in retirement that lasted as long as the pensioner did and usually provided a residual pension to the spouse.
This offer is lost with DC and that is the real casualty of losing a Defined Benefit pension promise.
Going back to first principles
There are certain employers who take staff welfare very seriously indeed. So seriously infact that they continue to feel some kind of residual responsibility for their pensioners. The pension scheme I am a pensioner of- Zurich’s- is one such scheme. I get a lot of stuff from the Trustees of the scheme and there are pensioner clubs that I can join , discounts that I can take advantage of. This is a legacy of a bygone era but it is very much alive.
The reason that Zurich funds all this is far from clear. Were I in the Zurich staff DC pension scheme, I suggest I would get none of this. So why not?
If the first principles of offering an occupational pension scheme are based on providing welfare for retiring employees, what changed when DB was no longer offered to new hires?
Going back to first principles does not give me any answer to that question.
What do the bosses do now?
Today I will be meeting the HRD of another famous British Company with a DC pension for the staff.
She may have the same question as others I have spoken to. It is essentially the question of this blog.
If, as the FCA tell us, there is no advisory network attractive to the majority of people entering retirement, then most occupational pension schemes are actually planning on leaving staff to unadvised drawdown – with all the perils the FCA have identified. People pay too much tax by taking too much too soon, they do nothing because they feel frightened, they move or are moved to cash, some even get scammed.
Bosses, terrified of offering advice often stand by.
What solutions are there?
There is very limited capacity from the corporate IFA market for workplace seminars, financial education and even some advice. This is targeted at the large schemes where the sponsors have deep pockets and/or the sums in the member’s pots are worth advising on.
The capacity is limited and the quality often blemished where there is a vertically integrated SIPP on offer subsidising the cost of advice through a derivative of contingent charging. Financial education/wellbeing etc is often no more than a front for a product sell.
Genuine advice on what to do is extremely costly as it involves the adviser knowing each prospective client, a process that is exhaustive both in time and money.
The FCA’s remedies could prove helpful for these large schemes but the solution is still a way away. It isn’t clear how effective the remedies will be and it’s quite clear that the clock is ticking on a very difficult problem.
Last year , the clock was wound forward, many of the DC pots in or awaiting drawdown are 15% off 2017 highs and we’re beginning to see impatience and anxiety among people who have always considered that if they saved hard, the pension would take care of itself.
Bosses have to care – there may be no-one else
If the policies to do with wellbeing , wellness and financial education mean any more than HR speaking with itself, then HRDs and Reward managers are going to have to address the plight of older employees who are facing retirement with little help either from bosses or the market.
It amazes me that after spending a fortune on a staff’s pension pot, some large employers have little or no mechanism for ensuring that money is placed into a structure that provides something like a pension . DC just isn’t doing this – and certainly not occupational pension scheme which can divorce staff from the support structures of an insurance company. Staff really can be on their own, the day they walk out of that door for the last time.
The answer may be in CDC, which – while not as perfect as DB – does at least offer a wage for life solution without anyone going through the agonies of the advisory process.
The answer may emerge from the remedies of the Retirement Outcome Review.
What is sure is that the answer is not to do nothing and wait for something to come along.
I’m interested in any bosses who read this and would like a meeting. I really want to understand how this question looks for them. Of course I’ve got skin in the game and there are solutions I would like to discuss, but I approach each meeting with an open mind – though often I leave them with a heavy heart!