This blog touches on inter-generational fairness and asks that we look at private pensions as a whole. There are some who consider DB and DB surpluses, some the new stars of the DC world (the Master Trusts) but people did a lot of saving into DC pensions before auto-enrolment came along. We need to renovate personal DC pensions as we need a new Oasis.
I am struck by Steve Hodder of LCP’s article. Clearly the comparison of Oasis coming back 30 years after they did a good album is not going to do much but warm the hearts of the 4o year old’s plus. To suppose that they will be getting anything like the pension that people retiring in the 90s or since are getting is like saying saying that Oasis can revive a 90’s style rock and roll today. We have a much better state pension, pension credit and in stead of SERPS we have auto enrolment into workplace savings schemes.
But for DB schemes funding is indeed locked down as Steve explains…
There has been a lot of talk on this blog about DB pension surpluses being ephemeral. On the VFM podcast, Michael Jones of Eversheds suggests that the trustees, in order to invest surpluses in growth and distribute to sponsors and members, might buy in members with an insurance policy that “guaranteed” the promised pension. Clearly there is a body of thinking from actuaries and lawyers that considers the fiduciary duty of trustees is to provide 100% certainty, despite their being a sponsor , despite there being a PPF.
You can listen to Michael Jones, a “DC pension” lawyer, to do different things with a DB surplus to distribute the surplus to help new joiners to the DC pension (who might not have been born when Oasis starred).
This feels like crumbs that have fallen off the table and are being snapped up family pets at the end of the meal.
Listening to the discussion of “accrual” in the residual of the DB portfolio comes the question from Michael Jones “what does the employer do to match the past for current employers?” – is there a (pension and rock n roll) spirit that existed in the 1990s for today and tomorrow’s working generations.
I quite like Michael Jones of Eversheds, despite his suggestion that schemes should need lock down benefits in annuities! He calls on Matthew Oakley’s recent report from WPI economics and Matthew looks like he still has something of the spirit of the 1990s burning in his heart . The WPI economics report says that with scale comes dynamic opportunities to provide better benefits.
This is the talk so far from the Labour Government and in particular of our Pension Minister. Whether he sticks around to see this through as Pension Minister I doubt , but in a promoted position within Government he can continue to influence Reeves and Starmer to change attitudes in pension.
Jones points out that most large DB pension schemes have adopted a Section 251 clause allowing the payment of surpluses to work for sponsor and member and maybe more (Pension Bill/Act willing). But there is a lot of money in pensions that is not connected with the workplace, as the FCA show in their recent pension section of the Financial Lives Survey (2024).
As Nico Aspinall points out, Aviva have ten times the money in contract based pensions than they have in a master trust. To suppose that the problem is something that can be solved by leaning on large DC schemes is missing the bigger picture. Some of the largest DC plans are the GPPs, Stakeholder Plans and other personal pensions, which look as faded as the Gallaghers.
When you refer to “a much better state pension” I guess you are just thinking about the Basic State Pension/New State Pension comparison. And it’s true that the latter is higher than the former, although it’s still open to question as to whether it’s high enough. But the proper comparison is Basic State Pension + SERPS with New State Pension + automatic enrollment and here it is clear that while there are some winners, for most people the former provide the better pensions.
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I am influenced by Andy Young to think AE contributions are the replacement for SERPS/S2P. AE workplace pensions are not of course providing much pension. The problem of working for Eversheds and LCP is you only speak at work to those who can afford your fees, we have a Government which I hope will think about private pensions for everyone (not just the lucky ones).
Listening to the podcast discussion on the use of DB schemes’ surpluses, the one thing that appears to be ignored by everybody is using the surpluses to fund future DB benefits.
There are many benefits from the employers’ point of view of running the scheme on a fully open basis:
The surplus can be used to fund future benefits without loss to tax.
Future employer pension contributions commitments are no longer fixed as in a DC commitment (and are not subject to an upward adjustable legislative minimum)
You are not forced to share the surplus with members before making it available for refund or transfer to current employees DC pots.
The surplus can be invested to increase future returns, because of the improved cash flow position of the pension scheme.
Future employment costs are reduced.
The recruitment and retention benefits of guaranteeing a DB pension are obtained.
All this can be achieved under present legislation.
It is interesting to note that the Pension Scheme Bill’s proposals are believed to be purely to provide an optional over-ride to Deed rules which prohibit the distribution of surplus to the employer, yet I hear that the vast majority of pension schemes already have that power in place. The fact that few have already used that power before buy-out should surely be indicative of a lack of interest.
The “growth” agenda effect of reopened DB accrual is likely to be considerable more and the effect than the widely ridiculed £160BN figure provided by TPR. Even the effect of the true figure of one-off cash refunds to employers will be reduced by the loss to the UK economy from dividends and share buy-backs benefiting non-UK shareholders.
The important communication message is that the future DB accrual rates need not match the historic rate and can be set (subject to the auto-enrolment minimum of 1/120th of qualifying earnings) at a level that the employer feels confident can be funded over the long term. All this is entirely under the employer’s control.
Pension SuperHaven will be another way to offer DB to staff who have pots and want more than an annuity – a pension!