Three things prompt me to write this article
The work of Dr Iain Clacher and Con Keating into the unequal burden regulation places on the sponsors of defined benefit pension schemes
The agreement between unions, Government and employers in the Netherlands to move away from guarantees and towards what we call CDC
Holland’s largest union has today voted to support major reforms to the Dutch #pension system which will bring to an end “Defined Benefit” style arrangements for millions of workers.
— Josephine Cumbo (@JosephineCumbo) July 4, 2020
The amendment in the Pension Schemes Bill that commits the Pensions Regulator to sanction relatively aggressive investment strategies where trustees and sponsors want to keep a DB scheme open
The three matters are aiming in the same direction, the proper payment of pension promises through the efforts of employers, regulator and trustees working together.
It has long been recognized through surveys conducted by consultants (Aon and XPS most recently) that ordinary people look for their workplace pension to provide them with a pension. While there are many people who have opted instead to transfer their pension rights into the hands of wealth managers, it is generally acknowledged that such transfers are for the few who do not need a wage in retirement, rather than the many for whom pension freedom is a tank trap.
The Dutch decision should be seen in this context, if the alternative to a guaranteed system of pension payments is the workplace DC systems of the US (401K), Australia (Super) and the UK (workplace pensions), then better to keep a system which does at least offer people what they were promised – a wage in later age. 401K, Super and the British workplace pension system offer people wealth not pensions and the term “wealth” is not that suitable , if it is kidding people it is a substitute for a pension.
Simple truths (no kidding).
It costs a lot to pay a wage for life. If you want a wage for life at 60 and you want wage growth of 3% pa and for it to continue to your spouse if you die first, then think of saving £750,000 before you can retire to what the PLSA considers a moderate retirement lifestyle. This level of wealth is beyond the comprehension of most people in the UK today but it is what is needed to provide a private income of £20,000 pa for the rest of your days.
This is why we need to inject some realism not just into the debate about what UK workplace pensions are supposed to be doing but also asking how we can preserve what’s left of our collective pension system, both in the UK and in the Netherlands.
Read Con Keating and Iain Clacher’s excellent article as an answer to that question. Consider the Lords amendment to keep DB open, as an answer to that question.
“I want to level with you”
Boris Johnson’s phrase, with which he introduced lock down , lives with us. COVID-19 has asked and will ask questions about the true state of affairs in the UK. If truth be known, if we use the valuation techniques employed for DB transfers and implied by the Pensions Regulator’s funding code, the transfer value of a full state pension is around £300,000- to provide us with a wage for life of c £8,000. You cannot take that transfer value as the purpose of the Government backing the pension promise is to keep people from destitution not make them “wealthy”.
£750,000 might give you a moderate retirement income but that is on top of your state pension, the reality is that to have even a moderate income in retirement , you need a million pounds to fund it – or you need to stay at work or you need to die young. These are the hard COVID-19 truths.
I want to level with you. There is no cheap way round this problem. Though you may want to create a lifetime mortgage on your property, you are unlikely to generate sufficient liquidity to provide you with the wage for life you would have got had you been in a DB scheme.
Those in tax-payer funded pensions such as the Civil Service, Teachers, Fireman’s or Local Government pensions will be getting millionaire’s pensions if they can retire on as little as £25,000 pa.
For the vast majority of workplace pension savers, the 8% of band earnings that is paid into their workplace pensions will not be enough and even if that 8% was doubled, there is no proper way of returning the wealth in the DC plans as a wage for life. The cost of advised draw down are currently excessive, the price of annuities too high and the risks of DIY retirement planning for the bulk of the population too awful to give much thought too.
We need pragmatic solutions for today and strategic solutions for tomorrow
By harnessing technology, we can at least make sense of our retirement savings today. A proper system of finding pensions, displaying pots and providing people with investment pathways is the best we can do today. It is not the nirvana promised by pension freedoms but it is better than nothing.
For the future we need a strategic solution and were we thinking as the Dutch are thinking, we would start moving to a non-guaranteed system of workplace pensions which did not promise wealth but pensions.
We need ways to encourage employers who want the real promise of a wage for life to be able to use their best endeavors to fund those promises. This might mean continuing to other funded pensions without guarantees or it might mean thinking about funding as Clacher and Keating do.
We need to resist the lock down of open pensions into “de-risked” bunkers from which there is no prospect of future accrual and every prospect of penury or bankruptcy for the sponsoring employer.