I will resist giving Pension Oldie a regular column on my blog , only because I want him to enjoy his retirement without the curse of deadlines. He is however, a commentator of great merit and he has commented on WTW’s proposals yesterday with the wisdom of his years.
“A country for old men” (and women)
Following on Adrian Boulding’s excellent analysis on why CDC should outperform alternatives https://henrytapper.com/2024/0
It is likely to be those who will require the best possible pension in retirement that are most likely to struggle with higher contributions now and hence most likely to opt out when faced with a higher default.
While whole life CDC appears stuck in a regulatory quagmire – opening DB accrual is available to many employers now. Has WTW worked out what pension benefit they could realistically be expected to provide using the Company’s workforce profile for a given level of contributions, and using realistic long term assumptions (say a 1% real return as the low risk discount rate).
The minimum DB benefits levels for auto-enrolment are an accrual rate of 1/120th of relevant earnings on an average salary basis with minimum rate revaluations and pension increases of the lowest of CPI, RPI, or 2.5%. Could an employee contribution of 5% plus whatever contribution the employers is prepared to commit (whether 3% or more) fund that level of benefit? Would DB benefits at that level be expected to provide a better pension outcome for the employees than could be expected with the same level of contributions paid into any alternative DC arrangement? These are the questions that should be asked.
If the employer is particularly risk averse, a hybrid scheme (a la the USS) could also provide a pensionable pay cap for DB benefits with contributions above the cap paid into a DC section (which would likely be the first source for the retirement cash sum) givings drawdown flexibility to higher paid employees.
An open DB scheme increases the possibility of future member benefit enhancements and surplus distribution to the employer/sponsor under the Government’s current proposals.
Very significant further advantages accrue to employers with closed DB schemes. They do not have to consider the imminent additional cost of buy-out or other off balance sheet consolidation against asset market values. The short term cash drain on the pension schemes assets is reduced or indeed may be reversed. There is also the effect of the introduction of a tranche of new younger members into the Pension Scheme’s valuation data. Over time these will almost inevitably reduce the deficit contributions to be paid in addition to the current year’s payroll contributions to nil
A paternalistic employer may also wish to consider subsidising the employee’s contribution for certain groups of workers (e.g. the low paid or the young) to discourage opts. The ulterior motive will be that the such employers will also gain for the advantages of the size and duration of the pension scheme.
