Unlike the view of the pensions industry that wants more money paid into pensions, the comments of FT readers (and the stated view of Government) is that the nation wants better value for the money in pension pots.
As I have recently written, the Government is showing no intention to increase the mandatory levels of contribution into workplace pensions , the only increase in pensions, as evidenced by ONS is the increase from wage inflation. DB payments by employers are reducing as the perception of “need” to meet “pensions” reduces. We are no longer so worried about liabilities and we have had two decades of high payments to ensure that schemes are secure.
The article published by the FT and written by Mary McDougall has sparked a new headline calling for what most employers will regard as an increase in pension taxes. Add a call for higher mandatory payments into DC workplace pensions and the discontent over NI increases will increase further. The Pensions Minister made it clear in Edinburgh’s PLSA conference that the increases planned for the middle of the 2020s in the 2017 adequacy review, will have to wait still further.
Those calling for more contributions are Steve Webb, a former Pension Minister and now a consultant with LCP and Zoe Alexander, calling on behalf of the PLSA who set the benchmark for what the pension industry considers “adequate”. The argument is that we must get AE contributions from 8% of band contributions to 12% of total earnings over time. That is the pension industry’s argument for adequacy in retirement but it is not the only argument from this Government.
There are three factors that we could look at in improving the value of pensions coming to those yet to drawdown their pots.
The first is to make the pot bigger by increasing contributions and this has been ruled out (for the moment).
The second is to get more from investment of the pot, this is a huge subject but if we are to believe in productive investments, it means investing more for longer and de-risking less if ever.
Finally, it is time we considered pensions as whole of life collective mechanisms that offer people a retirement income for as long as they live. This final requirement of DC pensions seems to be what the Government is moving towards as it increases efficiency (VFM), encourages people to pay loose money into pensions rather than “pots” and enables long term investment in the capital investment projects investors have in this country and abroad.
Employers disillusioned with pensions
As I have written today on this blog, there is no perception by employers of pensions as the way people retire. Pensions are a perk but that is not what people want, people will pay in more if what they feel is a pension, but they are vaguely aware that what they get is “freedom from pensions”. This is leading to discontent
We need to be worried not that companies aren’t wanting to pay in more but that nobody seems bothered. Workplace Pension contributions are seen as taxation not deferred pay.
Companies paid £14bn into defined benefit pension schemes in the year to September. Three years previously, the figure was £27bn — or £32bn after adjusting for inflation.
They are showing no interest in paying in more right now but I suspect they would be interested in pensions that returned more over time and replaced wages when people reached retirement (full or part).
The most appreciated comment on this article (with 76 comments) was that this was a non-story
I am one of the 76 recommending King Canute’s contribution. It is only the “pension industry” which wants more to be paid into the pots, the country wants to see pensions work harder
And the most common comment comes from FT readers fed up with the hold pensions are in by pension professionals determined to de-risk at the expense of a nation’s productivity
The concern of the pension industry is that they have lost their public and have allowed pensions to be seen as “nonsense” by those who run private companies. The workplace pension replacement for DB pensions is not taken seriously and rightly so, it is a part built construction with no roof, it is not a pension system but a saving system. Only now is it looking to get its investment act together and move on from pooled funds invested in global equities, corporate bonds and cash.
The
In addition to my comments about executives in the previous blog, this relentless focus on VFM is a complete misnomer. Profit is the difference between two things – revenue and costs. In this case, profit = net investment returns.
It is all very well pursuing minimal costs and seeing this as providing value for money. However, what members need is maximum long-term investment returns. If we spend all our time focused on cost reductions, we will not spend enough time on maximising gross investment returns. Furthermore, in a relentless pursuit of minimising costs, we will just drive investment into largely the same investments i.e. a complete lack of diversity across the DC universe.
We need to spend more time talking about the author’s point 2 above, and less time talking about point 3. That’s hard though because 2 is unpredictable but 3 can be made certain and who doesn’t love a conversation about reducing costs? Let’s blow out the 2bp candle in the corner while ignoring the 50bp fire elsewhere.