bothered?
I spent some of the weekend writing a submission to the Treasury as evidence for its pension review. I had hoped to share it with you but once you’ve pressed send , your response seems to be gone forever, fine for AgeWage and Pension PlayPen but not so great for a large company’s public policy team who presumably would like to remember what has been said! Hopefully there is a retrieval mechanism.
The submission got me thinking about consolidation from the point of view of the employer.
The original decision to choose a workplace pension for certain staff might have been taken 60 or 70 years ago- even longer for some companies with “British” in their name and that decision was typically taken to reward valued staff with deferred compensation as a means to attract, retain and thank those who generated profit and growth for the company.
As we all know, those early promises were revised over time, were crystallised as a result of scandals into guarantees and no sooner guaranteed but dropped when the weight of the guarantee became unacceptable to shareholders and those in senior management who saw those pensions as an encumbrance to profit and growth.
The point is that pensions went from an incentive to a disincentive very quickly, in the years leading up to the millennium. Very few executives turn up to pension conferences, pensions have been handed to the pensions industry, employers are there to pay defined contributions required by the Government or the ill-defined deficit contributions needed to keep trustees at bay. What started as deferred compensation has become a compliance function.
Re-engaging employers
Much is made of engaging employees with their retirement saving but very little is talked about engaging employers. Why should executives, other than for their own finances, care very much about the structure, investment or benefits arising from their workplace pensions?
If the point of the pension is to comply with regulations, as is the case with most employers outside a magic circle who pay advisers, have pension teams and attend pension events, then choosing a workplace pension that is least bother is the key factor. Initially this was a matter of payroll, more recently it has become a matter of price and at some stage in the future it may become a matter of “value”. But until we define the value of a pension scheme, then payroll considerations and the price of the pension will continue to be the main considerations for the employer.
The Treasury’s call for evidence should be re-entitled “getting employers off the pot”. Because to get employers to “review pension investments”, there needs to be a short sharp shock to make investments matter to bosses. The call for evidence asks whether there should be incentives to adopt illiquid investments and Nigel Wilson’s paper on the Capital Markets of Tomorrow calls on pension schemes to be incentivised to invest in UK growth. But this will mean very little to small and medium sized employers stuck in the payroll/price loop,
To get employers off the pot, there needs to be a bigger idea, one that intuitively makes sense to bosses for whom a workplace pension is a pension. Recently, Cosmo Gibson of the Federation of Small Businesses mooted the idea that employers who embraced progressive pensions (he was talking of CDC) might be exempted from some or all of the extra costs of implementing the upcoming 2017 AE reforms.
It’s a quid per quo that went down like a lead balloon in the room I was sitting in (full of pension experts), But in a world where pensions are now a compliance cost, it does at least address the employer’s principle concern, the cost of compliance.
The role of Government in shaping a new pension landscape needs to include the pension investment review that the Treasury is currently carrying out, but that should not be the extent of the review. The call for evidence needs to address the duration of the pension schemes that employers are being asked to fund. If these schemes are no more than savings plans that are claimed from 55/57 or some other notional date, then employers will not engage with them as workplace pensions.
Alternatively, if these workplace pensions are promoted with the common purpose of paying pensions, then employers may start linking the pension to the “profit and growth” that the pension system was designed to promote in their origin story.
Consideration of a contribution paid to an 18 year old, that might still be paying them a pension 70 years later is a radical way to promote pensions to an employer. but it makes the point that pensions have a different purpose to workplace ISAs, share save and all other employee benefits.
To my mind, Cosmo has got it right, we need to incentivise employers to want to fund pension schemes and to do that we need to give them schemes that target pensions and not lump sums. By bluntly stating that the last payment of a pension as the payment prior to death, pensions demand long-term thinking and long term investing.
Our current way of presenting workplace pensions lacks any common purpose, small wonder most employers treat them as another workplace tax.
