I wrote a blog over the weekend (sorry it was badly written – I was in some pain). In it I said that employers had every right to make promises about pensions over-reached the expectancy of the management to be around when pensions were being paid. This was badly written.
I think there are some employers who have an expectation of lasting indefinitely, my friend Peter Cameron Brown runs a scheme that has no end as it takes new members into a pension scheme and may soon pay DC pots into the pension in exchange for more pension. Here is an example of an employer that you can see in one shape or form in 120 years paying pensions in whatever currency we’ve adopted by then.
But I was wrong to be tough on employers who have closed DB plans because they think they should never have opened them (the vast majority of private companies- let’s face it). We set the bar too high for final salary or even career average pension schemes for many firms who’s aspiration to have the longevity and covenant of someone like LGPS or USS could not be met.
That said I do see hope, this is what a friend of mine sent me last night after a day of thinking about a comment made about pensions being paid to war pensioners generations after the original pensioner had died
(1) see American Civil War widow pensioner stories.(2) do schemes generally not pay survivors pensions to partners more than 20 years younger?(3) it is unrealistic to expect private sector companies to last 120 years, or anything like it. Just look at how many employers wound up their schemes when they could, and shafted some of their members. Plus all the insolvencies. (Public sector schemes will in due course come under strain from falling fertility and shrinking and ageing populations).
Now there’s some deep thinking going on within the casual phrasing but what we’ve been talking is creating new kinds of pensions, like the one being thought of by Nest, where some form of certainty can be created by sheer size for people who want pensions now and employers who may be around 120 years but likely not.
Here the underlying thinking is that we will need Government organisations to provide the long term promises, Nest of course are not the only one. Include the quasi Government organisations doing Government outsourced work in infrastructure and think too and maybe a few private pensions that get to the size (£25bn is the current Government set amount) that they can start taking on long-term obligations.
I don’t have worries about SIPPs and other retail options which are available to those with the means and the wish to go it alone, but I just see no wish from the mass of the population to get anything from their pension but their pension.
It is not going to get easier with an ageing population and with employers staying under pension benevolent ownership. The few I have been listening to over the past week have been exceptions not the rule.
We need schemes that are of a size £25bn +) and covenant (AA+) to take on the long term obligations of running schemes as I imagine them – pensions running over 120 year cycle.
It may be that we can only do this with CDC where the guarantees are trimmed to nil other than a promise of contributions and these will require strong providers with business plans that show they have a 120 year timeframe.
Pension provision needs to buck its ideas up for the 22nd century! Necessarily the Government must play a bigger part.
While I fundamentally agree, I would point out that a pension scheme in surplus is a company asset. This will make the company with the pension scheme asset an attractive take-over target even if the underlying business is no longer viable. The acquiring company can reverse its own employees into the pension scheme to be able to gain the benefit of reduced pension contributions partly funded out of the surplus plus the additional investment return from the surplus assets and the long term investment horizon. The acquiring company, if it is not already doing so, will also gain from the fundamental cost efficiency of a DB pension promise over DC contributions (the invariable nature of the DC contributions fixed under TUPE can act as deterrent to a take-over or a restructuring).
While a commercial consolidator, NEST, or similar organisation taking over the pension promises will also benefit from these gains, the ceding company does not and indeed may lose asset value and the employees are left with an uncertain pension future.
Consider what has happened with the PPF where the levy contributions plus the assets acquired have outstripped the pension promises taken on. A classic case of over-estimating the cost of DB!
Peter, I cannot disagree with you. A DB pension should be seen a a positive asset for any shareholder looking for a valuation – even when the sponsor is in bad shape. But this is not how pensions have been valued, they have been considered as a liability.
We need to find ways for companies to feel proud of what they are investing their and their employees money in and I think this is more than tales of where money is invested (nice as it is to get this right). What we need is what you have been showing your members, increases in pensions over time, earned from investment returns earning more distributable pensions from accrual over time and the transfer of money in at retirement. I am hoping you will tell us this will be more than could have been available from an annuity.
The PPF has been an example of over securing the promised pensions and this is a story that can be repeated with many pension schemes in the last 20 years. Over -estimating the cost of DB – indeed!
“…I just see no wish from the mass of the population to get anything from their pension but their pension” is the only point I would disagree with.
A lot of those I speak to who have DB benefits are quite shocked when they learn that (in their view) “That money, all those contributions I made, will be grabbed by the scheme once I (and my spouse/civil partner) die since I have no other potential beneficiaries, my children having grown and moved out. That’s simply theft of my money!”.
Of course I have no hard evidence that this view is held by the majority as my sample is largely self-selecting, but since most members of private sector DB schemes are older deferred or pension members then that is my strong suspicion.
Since the freedoms introduced in 2015, I think pensions have increasingly been seen as a source of a windfall at 55 and then an income if they live and an inheritance if they die. I feel that any mass understanding of the niceties/value of a DB scheme as longevity insurance has been lost.