Why the pension challenge to the Executive won’t go away

 

The biggest remaining challenge for trustees and employers is how to get their closed DB pension schemes safely over the line without a nasty covenant mishap en route. – Simon Willes (Chair of Gazelle)

I would agree with this statement if Simon rephrased it as “the biggest immediate challenge”. Government should be doing more to help employers find positive alternatives to insured buy-outs or the PPF, DB schemes could and should be heading for superfunds that manage risks without exposing employers to nasty pension mishaps. That is the thrust of Simon’s argument, but I hope he recognizes that once the DB challenge has been overcome, a further challenge remains.

Employees look to employers to fund their “workplace pensions” and implicit in that phrase is an expectation of a wage in later age – once the employee is an ex-employee.

The current settlement – the DC savings scheme – offers a pot but no pension, the expectation is only half fulfilled.

And the expectation of the pot providing an income sufficient for someone to stop work is not being properly managed. Recently , the Treasury’s clampdown on the use of normal minimum pension ages , exposed some worrying expectations from the national press

Anyone who thinks a workplace pension is going to give you the freedom to retire at 57 – let alone 55, is either very lucky or very ill-informed.

Employers may think that this kind of misinformation is not of their making nor of their concern. But they could be wrong. People jump to conclusions because of lack of information, many people think that Nest pays extra state pension because nobody told them anything about it except that it was the “Government’s workplace pension”. People growing up in families where senior generations get a monthly payment from their pension , may know nothing else.

When Royal Mail tried to move from providing pensions to pension pots, their unions threatened strike action, the resolution was a compromise where risks were shared and the employer agreed to a defined contribution scheme that paid a wage for life – many postal workers expect the CDC scheme to pay a DB benefit and managing that expectation is key to the success of the Royal Mail corporate pension plan.

Most DB closures have not been as controversial as Royal Mail’s. Only the USS has inflamed more industrial unrest in recent times. But employers should not be complacent. Nine million people will be reaching a stage in their life over the next ten years when they have to or want to take money from their pension pot. Evidence so far is that many do so with little guidance or advice and that they go for the low hanging fruit of tax free cash rather than trying to recreate a pension. This is fine for now, but what of the future?

The original employer covenant for DB pensions was based on employers using their best endeavors to provide selected staff with enough in retirement to enable them to stop work. On this promise, normal retirement ages were established and working practices created around assumptions such as a job for life. Of course people didn’t have jobs for life and many didn’t participate in the works pension or – if they did – found they were refunded their contributions when they left early.  DB worked well for certain groups of employees and for certain workforces as a whole (USS and Royal Mail are examples).

But DB schemes were exclusive. Kingfisher for many years gave all staff the option of a contributory DB scheme but defaulted all but the white collar workers into a non-contributory DC scheme which barely matched the SERPS benefit it contracted them out of. This may have been one of the biggest DB opt-outs in British history as over 100,000 workers participated in the DC  KRT when the option to be in the contributory DB plan was open to them.

Pension practice over the years , shows huge risks being taken by employers, along the lines of Kingfisher’s. Pension protections today are stronger. Employers rightly feel ring-fenced from the obligation to provide a pension when contributing to a DC workplace pension. They remember how KPMG were caught out when they started referring to their staff’s DC plan as a “target pension scheme”. This is why most employers won’t embrace risk-sharing under the current CDC proposals.

But refusing to risk-share is not the same as taking the risk away. The risk of  relative poverty in retirement persists. It’s just been passed to individuals and to the State.

Once employers have met the challenge of legacy DB promises, they still have to deal with employee’s reasonable expectations. This challenge may require employers to do more than just signpost Pension Wise.

And as the impact of the annual allowance and lifetime allowance bite, a lack of pensions may become a problem for future executives. Enlightened self-interest among such executives, may prove the catalyst for change, and that may mean pensions returning to the risk registers.

About henry tapper

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