Pensions for all -not just the public sector

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Hilary Salt

Although I’m pleased that pension promises to the Firemen and Judges are to be extended to all public sector employees, I’m sorry for the millions of private sector employees now in DC savings plans whose reasonable expectations were for a wage for life from a DB scheme.

It remains odd that the public sector – which is supported by the wealth generated by the private sector, should have its pension system reinforced, while pension promises are withdrawn at will elsewhere.

It leads me to think that such inequality is in the long-term – unsustainable.


A best-estimates pension or a guaranteed pension

I have worked with Hilary Salt now for the best part of 10 years. I remember when joining First Actuarial, her spelling out a vision of a levelling up of pension promises so everyone could have a reasonable expectation of security in retirement from a replacement wage from their lifetime saving.

Many people talk of such things, few have made it happen. I firmly believe that had Hilary not stuck to her guns, the CDC scheme that looks likely to arrive at Royal Mail in the next couple of years, would never have been broked between staff and employer.

CDC is of course a DC plan , but its outcomes are pensions and not a pot from which a pension can be bought. For 140,000 Royal Mail workers, the outcome of their pension saving will be a wage in retirement which should meet their expectations from previous arrangements.

While the CDC scheme for the Royal Mail is a risk-sharing arrangement with the employer’s liability being capped at a percentage of salary, there is no cap on the Government’s liability to public sector pensions. The McCloud judgement will add £4bn to public sector pensions debt.

Though this extra debt is serviceable, it’s announcement comes at a time when we are holding our breath over the impact of Brexit and is bound to cause resentment amongst those who feel that they have suffered enough at the hands of politicians. I mean of course those who manage and work for private sector enterprise.

The lack of flexibility within public pensions means that pensions are now seen as part of the problem not the solution.

I hope that in the long-term, an exchange of promises – from guaranteed funding to best estimate funding in the public sector, from pension pot to best estimate pension in the private sector- will prevail.

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A lifetime’s achievement from public sector pensions

The grant of a pension, whether it be guaranteed or conditional on the affordability of the promise, should be universal for UK employees. I think it should be a condition of employment and should be something which the self-employed should be able to opt in to as well.

A pension is the reward for a lifetime of work and its achievement a principal outcome of our labour.

It will be a lifetime’s achievement to  make this happen and I hope that there are young visionaries – of the intellectual stature and with the moral compass of Hilary Salt who will see this through.

Public Sector pensions can be linked to the capacity of the state to pay them and be part of a deal with the private sector that does not cast the burden of affordability on the tax-payer. Public sector pensions should be linked to the capacity of the state to pay and the decision on what should be paid , should be created from a consensus between private and public sector.

At present , the private sector have little or no say in public sector grants – other than through their limited capacity to elect politicians.

It would be a lifetime achievement to create the conditions where a more equitable second-pillar pension settlement could be implemented.  I do not see it happening at any time soon, but it is a work in progress for the young visionary I hope is out there!


A lifetime achievement from private sector pensions

I am optimistic that private sector pensions can be reinstated, as part of a DC system which benefits from lower investment costs (disinter mediated) , cheaper and more accurate administration (using distributive ledgers) and better engagement (digital communications).

When I say “reinstated”, I mean that for all people who are currently saving into DC, there can be a promise of a best estimates pension at the end of their saving – calculated using actuarial assumptions on collective mortality and implemented through the pooling of risks in the collective vehicles we are beginning to understand – CDC.

Critics will dismiss this as “waffle”, I admit I am not a mathematician and there are no numbers in this article to back up what I say. But my argument that the private sector can pay pensions rather than pension pots is based on my understanding of people’s risk appetite. I know people and I think that people will accept the risk of a market based pension solution in preference to a market based pension pot.

I do not mean that we should do away with tax-free cash which seems to me the acceptable compromise  for most people to the binary decision of pot or pension. People can have both, but the majority of a pension pot should be applied to the provision of a wage for life.


An end to the pensions of envy

My hope is that – within my lifetime (if not my working lifetime), we will see a new pensions settlement which will allow public sector pensions to become more flexible and enable public sector reward to meet the needs of a changing public sector workforce, I don’t mean by this a dumbing down of pensions, I mean a more constructive approach to risk-sharing than is seen in the McCloud judgement.

Inevitably, McCloud will reinforce the arguments agains “pensions apartheid” where the private sector envy the public sector and ultimately refuse to pay the price of public sector guarantees.

There will be more McCloud judgements, more pension strain on the UK balance sheet and more of our taxes going to pay public sector pensions. Our P&L cannot withstand ongoing stress without the elasticity of tax-payer support snapping.

Fungible and sustainable pensions – that’s what we want!

Hilary Salt  talks of the fungibility of pensions, I wrote about the fungibility of CDC five years ago. Re-reading that article I understand how a CDC scheme can survive in a way that a guaranteed DB pension cannot. Fungibility is the key to the sustainability of a private sector pension system – and it can best be achieved through best-estimate funding with a DC contribution basis.

CDC lifecycle

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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