Employers’ – don’t kid yourselves -you don’t pay pensions anymore

Read this statement carefully, it’s not from a DB survey, it’s from LCP’s DC survey and I don’t think that those 77% of employers really meant to say that it is the employer’s responsibility to provide sufficient income for employees to retire.

It used to be the case, in the olden days of DB schemes that provided a two thirds replacement income promise for those serving a career with the employer.

But today’s promise is different, it is a promise to pay into the staff member’s pot an agreed amount which will result in a pot of money being available when the member wants to wind down from work. That pot may provide a regular income. The FCA retirement income study shows that around 1m of the 4m savings pots crystallized since April 2015 are paying a regular income, 75% of pots have either been cashed in, or have had a partial encashment where the tax free cash has been stripped out. Only one in four of us uses our pot to provide a “replacement income”.

So are 77% of  LCP employers failing to live up to their self-selected responsibility? I don’t think they’d think that. They would point to the higher than average contribution levels the attention paid to the scheme’s funds and especially the default, the quality of communications and member engagement and they’d point to the low charges their members were paying. All of these are of course valuable reasons to be in a well run pension scheme – and if you have LCP as your consultant , I’d be surprised if your isn’t a well run pension scheme.

But as for your aspiration to provide a replacement income, face it – that is not your job. I know of only one scheme that is currently paying replacement income to members wishing to spend their pot (and that is heading for a master trust very soon).

The vast majority of employers are not paying an income to their retired staff (adequate or not) and have no intention of doing so. That is the job of the staff member with the help of investment pathways or whatever they can find to help them turn their pot into a pension.

And if employers think they are here to provide “sufficient income for (their staff members) to retire”, it maybe that that’s what the staff members think to. I am afraid that there are a lot of people in company pension schemes who have an expectation of a company pension at the end of it, just as there are plenty of people in the Government’s workplace pension who think they are getting a pension at the end of it. This is a real problem.

Rather than kid themselves and their staff, employers really need to think this one through. Telling staff that they have to make their own way home when they decide to start spending their money is not a positive message. There are of course people out there who will provide guidance on options (like LCP) and there are advisers out there set up to give people advice as to what to do (like Just’s “Destination Retirement” service. But at the end of the retirement savings journey we are generally on our own with our pot (s).

In a deeper dive into what an employer can do to help employees, LCP’s George Currie concludes

To help employees achieve good retirement outcomes, companies need to be more innovative in their approach to pension provision than they have been in the past.

I agree, but I also agree with the implications of LCP’s report. The clear implication is that employers should help provide a pot sufficient for the member to retire with sufficient retirement income. It is not the employer’s job to provide that income.

And when it comes to innovation, I think we need to look beyond the employer for a new approach to pension provision. Pension provision is an area where innovation is long overdue, but the paying of pensions is no longer the job of employers.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Employers’ – don’t kid yourselves -you don’t pay pensions anymore

  1. Adrian Boulding says:

    On average people have eleven employers during their career. So which one of the eleven should be responsible for providing the much needed income throughout retirement? Definitely time for some new thinking in this space.

    • Two comments: 1. That “average of eleven” employments is disputed by many, including Con Keating. 2. I’m wary of surveys of employers where the LCP contacts may have been in Pensions or HR departments rather than Board level including Finance.

  2. henry tapper says:

    We are doing work with the FCA data and the deeper you dig , the less drawdown you see, the data only relates to crystallised pots (eg ones where money has been taken out) but how many uncrystallised pots are just bobbing around like bottles in the ocean – is anyone’s guess. Ros Altmann likes the idea of us all rolling our retirement savings up as a buffer against the cost of terminal care, maybe that’s what will end up happening (though I hope I will be able to swap my pot for a CDC pension independent of any employer!

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