This post is by William McGrath, formerly CEO of Aga-Rangemaster, now heading C-Suite.
He is one of a breed of entrepreneurial leaders who see pensions as a force for good , rather than a millstone around the finance director’s neck.
Time for Corporate Sponsors to Embrace DB Schemes as ESG Flagships
The “Get Rid” Presumption is Replaced with Revitalise Now
The Risk Transfer Industry case is that corporates just want out. The patronising line of “leave it to me and you can concentrate on your core activity” is repeated regularly. But does it stand up to analysis?
| Chair and CEOs want to concentrate on core corporate activity | ESG Statements and Sustainability Reports make clear that environmental and societal issues head the governance agenda. Pensions are core and part of DNA : not a distraction. |
| Scheme is shut to new members | Shut on one basis; revitalised and reopened on a modernised DC basis. |
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Endless cost and volatility |
Volatility and contribution levels are well understood and under control after nearly 20 years work with TPR. It is time to update thinking. Start with schemes paying all the costs. Plan to eliminate all DB and DC costs from company accounts and have P/L credits. |
| Investor indifference | Not any more. Pensions can provide a boost to markets when a gilts fixation ends. As ESG / Impact funds see their remit as relevant to updated pension fund thinking. Surpluses are available to fund DC commitments, raising company cash returns. There will be real interest from investors on reputational and financial counts in the new mindset. |
| No financial upside | Surpluses will emerge that can be used to fund DC contributions and bring surplus repayments.
Earnings and cash benefits will materialise and financial market and ESG rating will improve. Markets will establish upward momentum. |
| Time / administration / employee disinterest | With new timeframes set there is a reason to look at the governance (including the trustee structure) and the admin of the scheme – areas in which the major consultancies have under-invested. Better systems will be a material boost as funds flow into productive assets.
As schemes reactivate and current pension provision is a topic linked to DB schemes, so the level of interest amongst relevant current employees will quickly recover. |
| Government and Regulatory pressures | Government has a renewed enthusiasm for investment. TPR’s role is tied in with Bank of England and PRA as never before. Avoiding life insurer concentration risk is now recognised as a positive of run on. |
| William McGrath,
Chief Executive, C-Suite Pension Strategies T: 07768 607204 |
TC Jefferson
Chief Executive The Plenum Group & C-Suite Partner T: 07581 466620 E: tc.jefferson@c-suiteps.com |
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I was thinking what are the ESG responsibilities at issue here?
My initial thoughts are that it could be deemed that the social responsibility of the Company is to provide its workers with a secure inflation protected income during retirement.
If so there are two issues that immediately spring to mind:
1. How far does a DC pension arrangement meet this requirement with its uncertainty about the actual outcome and also placing the responsibility on the employee to manage the pension and for which they may not be appropriately equipped or trained.
2. Should the goal of a DB arrangement not be to provide full inflation protection when in payment and also during deferral, and not just up to some arbitrary limit set in stone in a different inflationary environment.
I would be interested in other views.
I don’t agree that employers have to “provide” pensions when we also have a state pension and opportunities for employees to save/top up towards retirement needs. But I don’t think you meant that, as you go on to comment on the distinction between DC and DB sponsored pensions.
Employers must by law “contribute” to their workers’ pensions, but in practice some are much more generous than others.
If you work in financial services or as a teacher, these two industries are on average the most generous when it comes to contributing to employees’ pensions.
Companies in the electricity, gas, steam and air conditioning sector, mining and quarrying companies and the fewer remaining manufacturing companies are also among the better for pension contributions.
The least generous sector for pension contributions is agriculture, forestry and fishing.
Those working in the accommodation and food service industries don’t have much to write home about either when it comes to the typical levels of their employers’ pension contributions.
It’s a similar story for employees in the arts, entertainment and recreation sector, and also for many of those working in the administrative and support service industries.
These various employer categories I’ve referred to may not cover all public sector employees (who tend to enjoy higher contributions and benefits, whether funded or unfunded) or all of the many self-employed, but I’d suggest it’s at least a start towards a better understanding of which employers score higher or lower on “social” within ESG.
The very nature of employment has changed for many, with far fewer “jobs for life”. Short-term contracts and other HR factors seem to imply that many will have quite a number of distinct employments over their working lives.
I support “pot follows member” in DC space as a more effective way of avoiding a future in which many accrue quite a number of relatively small pots in various different places. You might say it’s a form of pensions consolidation.
I leave whether or not we need to “consolidate” DB to others.