Tom Birkin, Actuary at XPS Pensions Group, said:“For current pensioners, sustained periods of high inflation will compound the effects of pensions not keeping pace with rising prices. Pension schemes should explore options to support their members through this challenging period”
— Josephine Cumbo (@JosephineCumbo) September 14, 2022
Clearly the tweet and the headline are at odds with each other and this is worth thinking about. Infact I’m thinking about this quite a lot as I’m helping organising an online pension conference on what can be done by the “pensions industry” to help people through the cost of living crisis which has already begun and is likely to worsen through the winter.
Details of that conference are at the bottom of the blog, if you read this blog, you are the kind of person we’d like at the conference so please click the link.
Short or long-term thinking?
The headline refers to an online poll organised by Professional Pensions as part of its pension buzz service. 55% of respondents saw cost of living issues as no business of the pension while 45% thought trustees and providers had a duty to help members with their cash flow issues.
Some of the comments of respondents are revealing
“A pension scheme is not funding for today’s costs but for long-term retirement. Don’t raid the pensions piggy bank, or nothing will be left for old age when people are most vulnerable.”
Another was adamant
“It is not the scheme’s job to do this. What trustee should be doing is exploring ways to dissuade members from ceasing or reducing contributions to their pensions which may then not be restored in the future.”
Another respondent argued that “schemes should provide the benefits and facilities which have been promised, government and employers should be doing more”.
The employer’s covenant.
We hear a lot about the employer’s role in funding a DB scheme , but not much about its role in arranging funding of DC schemes. It is possible for employers to influence opt-out and pause rates on DC schemes by negative or positive actions. SUEZ, an employer that operates a workplace GPP, has recently instigated an online savings scheme alongside, using the sidecar approach pioneered by Nest Insight. It seems to have improved participation in the workplace pension by improving the savings culture throughout the firm’s 6,000 UK workforce (more on this later).
It is also possible to make it impossibly hard for those just getting by , by setting the qualifications for joining a pension scheme at too high a contribution rate. One of my big worries this winter is that employers who have subscribed to net pay pension schemes (which includes the entire public sector) will be demanding 25% more from low-paid employees than were they eligible for tax-relief.
Responsible employers like SUEZ , should be held up as examples of employers who are committed with strong DC covenants. Organisations that do nothing but enrol low-paid staff into net pay schemes, are liable to criticism from members and their unions.
The Government (or tax-payers) covenant.
The Ministers responsible for Pensions at the Treasury (currently Andrew Griffiths and Richard Fuller) can actively intervene in issues such as the Net Pay/RAS problem and yesterday I submitted comments to HMRC on how Government might amend the Draft legislation Finance Bill 2022/23: pensions relief relating to net pay arrangements to allow hardship payments to be made to those suffering what HMRC refer to as an “injustice” as early as April 2023.
I will continue to rattle the DWP’s cage about getting better guidance to employers on what they can and can’t say to employees struggling to pay household bills and pension contributions. Whoever the next Pensions Minister is , I’m not going to let up. The DWP has to play a role in striking the right balance between keeping people “in” where possible and letting them “out” when it’s not. I would like to see responsible employers rewarded with the option to keep employees as active members of pension schemes – even when the employee can’t afford to contribute. This might mean continuing the employer contributions, it might simply involve paying a minimum to allow related benefits such as life cover to be kept in place (these often fall away if a member is deemed “deferred”.
The trustee and provider covenants
Many employees are in schemes subject to rules drawn up by trustees and employers many years ago. These rules are often inflexible, meaning that those who pause contributions can only return to paying at the next statutory enrolment point (re-enrolment). It’s time all occupational schemes looked at adjusting rules so that employees who have to pause, can resume contributions when they like. One master trust (Smart) actually has a facility to set the period of pause (say for six months). I’m pleased to hear from its CEO that it intends to turn this facility on (if possible).
So Trustees can look at their rules and providers at their systems, to see what can be done to help those who struggle with paying contributions to do so.
But there is certainly good reason for Trustees to point to employers and Government as the primary drivers of succour for those needy this winter.
As for pensioners, I think it is clear that private sector DB schemes do have a problem with the cap on pension increases, they will be delivering real pay cuts to millions of employees. Their capacity to deliver hardship payments will again be constrained by scheme rules but some schemes are I know looking at what they can do.
Paradoxically, the 10% + hike in benefits to be paid to those in index-linked public sector schemes will provide first-world problems to a large number of middle ranking employees who may find themselves subject to a breach of the annual allowance and required either to dock benefits (through scheme pays) or stump up a payment to HMRC.
Trustees of schemes such as LGPS should be considering this and how they support those members for whom the Annual Allowance has never before been a problem.
The cost of living crisis touches everyone but the very rich. We have not had 10% + inflation for so long we have forgotten what it means for pensions. It will mean a lot this winter. So if you are involved in pensions , whether as a funder, an investor, a trustee , an adviser or just as an interested member, I suggest you register an interest in this Stephen Glover conference . Details of which are below.
You can register to attend here
It’s free for pensions executives, trustees, employers, official sector and trade bodies. There is a modest fee for investment managers, consultants and service providers.
The preliminary agenda is accessible here
If you would like to speak or sponsor at this conference please contact Stephen Glover at email@example.com.
There’s two separate issues mentioned here 1) whether it is sensible for those in work to reduce their pension contributions to have more money for energy bills, and 2) whether trustees of a DB scheme should think about paying pensioners higher increases than their scheme already guarantees.
On 1) when I was off work for a year being treated for cancer, of course I suspended my pension contributions while my income was down. Easy decision because my employer’s DC contribution was payable anyway whether I contributed or not. So the question for employers with DC schemes is will they pay their employer’s contribution regardless of whether the member contributes?
As for 2) there’s an important philosophical question here. If you think the main purpose of trustees of DB schemes is to provide pensions to past generations of workers but not current or future ones, and to do so in a risk averse way at maximum cost to the employer, then with that mind set you’re not likely to want to pay anything other than the guaranteed increase. Or if trustees do try to award a higher increase, it’s likely to be objected to by the employer who has already paid a fortune enabling the trustees’ low risk investment strategy.
But if you think that the purpose of a pension scheme is to provide affordably a reliable income for life in retirement, an objective which applies equally to current and future generations as it does to past generations, then part of the reliability of income objective is providing adequate inflation protection, and the affordability objective is met by investing for a decent return, in all likelihood in real assets providing a real long term return. With this outlook, investment returns boosted by inflation can be passed on to pensioners in above guaranteed increases without necessarily causing the employer cost anxiety.
So for additional increases to be awarded to pensioners perhaps requires a turn around of DB management philosophy and investment strategies widely adopted these days.
Thanks for that Derek – to which I will add a DM from a tweeter who knows his stuff (if not his phone)
The question for DB schemes is whether the endgame should be seeking to buy out non discretionary benefits – so capped indexation and perhaps NIL indexation or running on when they are funded on a buy out basis for these benefits aiming to pay discretionary benefits or should they buy out as soon as they can.
Arguments on both sides.
After years of the focus being on deficits, the risks of members not getting even non-discretionary benefits, the need to assess whether the sponsor can be expected to make it good, the risks of poor investment outcomes making it worse, the risk of insolvency when funding is poor, etc, we need to think more about the purpose of such schemes.