There is something very important about the company pension . It used to be referred to as “deferred pay” and may still be in some Government backed schemes. It was not unusual for the pension to be considered a mark of the company’s long-term investment in an employee’s future and many people did think of their retirement age as a change from being paid to work, to being paid as a reward. The link between the company and the pension was the pension department and the trustees.
All of this has been downplayed. First we had group pensions and then master trusts but these were not company schemes so much as employee benefits which the company’s contribution was a monthly payment and negotiation of the annual management charge. What comes out of these multi-employer arrangements is not deferred pay, it is a freedom from pensions, a benefit for those who considered “wealth” what retirement needed.
The question is fundamental. Are companies still considering themselves responsible for what goes wrong (death, sickness) and what goes right (survival into later life)? I think very few really felt that way while the great craze for providing them was alive. It was a late 20th century phenomenon and it lives on as DB pensions payable mainly to people who do not retire from the company’s service.
Now something new is happening, people who retire from service , now building up a pot of pension, will get offered a pension by default, they need not take it (they can opt-out) but they will have a right to a retirement income for life. But this is unlikely to come from a company pension and is unlikely to be a pension. The latest bright idea is a deferred annuity with a “flow of income” drawn down from the pot. This is a long way from deferred pay.
My contention is that a “float and fix” arrangement , arranged not by a pension department or trustees who are generally known to members either personally or through communications, do not quite hit the mark. Well they don’t hit the mark for the few companies who really felt that company pensions were deferred pay and benefits were critical to company culture. Such companies want more than corporate trustees, they want trustees who represent the employee (typically union or the like). They want to ensure that the company is properly promoted as sponsor (not participator as in a master trust).
The obvious example is Royal Mail, who went to such lengths to enable the company sponsored collective scheme to keep going, albeit without the old guarantees. There are a number of others whose approach to pensions is collective to a point where they consider the mortality of those in their DB pension schemes should be improved so that former staff are rewarded for service by a proper pension. I find the transport sector (providing bus, train and ship travelling services) an area where this attitude persists. Likewise established retail firms. Other sectors – such as telecom – have not such an attitude towards pensions, BT has a Standard Life GPP, Vodaphone is a participating employer in Lifesight.
To suppose that the contractual DC scheme (GPP) or the trust based but still retail DC mastertrust has outsourced “pensions” and taken over from collective plans, is to forget many company’s pride at having kept with their DB plans. Many have not outsourced to insurers and now talking openly about operating as multi-employer and single employer CDC plans with “multi-employer” recognising that retail and travel workers can often work in more than one employer with their interests at heart. It would be good to see other sectors taking this approach – they probably are – I hope we will see this kind of approach spreading. Whether own occ or trade occ, collective plans that pay pensions on a guaranteed or non-guaranteed basis are very welcome.
It may be that some of these companies with an historical embracing of best endeavour defined benefits will return to offering DB pensions to there staff. I believe that this can be done without onerous liability to employers by ring-fencing capital backed DB plans specifically to turn staff’s DC pots to pensions. The idea of a capital backed buffer has been experimented with by Edi Truell and has fund support among capital suppliers (banks +). It looks like a way forward for progressive master trusts who are looking to become attractive to savers and their employers who want DB pensions out of DC pots. It may also become attractive to own occ DC plans and even some employers who have enrolled staff into master trusts and GPPs. Their DB plans may be mothballed at present but might they become open (with capital rather than sponsor backing)?
My thinking may not be common in the market which appears at the moment to be obsessed with flow and fix solutions (deferred annuities). I am not against such plans where they fit but not everywhere. I think there is more shared ambition than insurers think.
The blogs and comments from others, show their are Trustees and Executives who believe in a “shared ambition” where employees and companies work towards collective company pensions as deferred pay!
I generally agree with the blog, but one thing.
Why should a sponsoring employer not wish to benefit from the investment performance of its pension scheme assets. In particular does it need to share any surplus with an external capital provider or other employers in a pooled scheme. If the pension scheme is building surplus assets over those required to pay the future pensions the company can improve its competitive position by reducing its employment costs achieved by reducing its DB pension scheme “balance of cost” contributions.
Is a small company sitting on top of a large pension scheme not a more valuable company than a small company with a high DC pension contribution commitment?
For over 30 years now we have been entirely focused on DB pension scheme failures, it is now time to think about what would generate pension scheme success for the company as well as the members.
I know you have made a great success of your DB scheme as have many other companies and trustee boards. There are dividends to be paid to sponsors after so much hardship and I am pleased that surpluses are becoming more accessible – they should encourage confidence in pension schemes rather than corporate paranoia!
I’ve been thinking about the constant state of confusion surrounding UK pensions, and I’d like to propose a thought experiment.
The default assumption is that the system’s complexity is an unfortunate, accidental byproduct of decades of layered legislation. But what if we challenge that? What if we were to hypothesise that the system is, in fact, operating with near-perfect efficiency, precisely as it was designed to?
If we were to write a “design brief” with the goal of creating the exact outcomes we see today, it might look something like this:
Objective 1: Create an essential and profitable advice industry. Design a system with rules so numerous, opaque, and constantly changing (e.g., the abolition of the Lifetime Allowance and its replacement with the LSA/LSDBA) that individuals and employers cannot safely navigate it without purchasing professional guidance.
Objective 2: Foster profitable consumer inertia. Overwhelm savers with choice and complexity to the point of paralysis. This ensures they are less likely to switch providers or move out of lucrative default funds, creating a stable, captive market for pension providers.
Objective 3: Generate secondary revenue from errors. Ensure the rules are confusing enough that a significant number of people will make costly mistakes (e.g., triggering the Money Purchase Annual Allowance inadvertently), creating a reliable stream of tax revenue for the Treasury from those who misstep.
Objective 4: Reward the highly engaged and wealthy. Build in just enough complex loopholes and optimisation strategies that those with the resources and knowledge can use the system for highly effective tax and inheritance planning, creating a clear advantage for a select few.
Objective 5: Create a fertile ground for bad actors. The resulting lack of public confidence and understanding creates the perfect environment for scammers to thrive, preying on the very confusion the system generates.
When you look at it this way, our current system doesn’t look like a failure at all. It looks like a resounding success in achieving the objectives listed above.
This isn’t to suggest a formal conspiracy, of course. But it forces us to ask a critical question: Are we constantly tinkering with a broken system to try and fix it, or are we simply maintaining a system that is delivering its true, unstated, and highly effective purpose?
Surely we should be investigating the outliers to see where success has been achieved.
Well maybe an output of the Pension Commission will be a clear statement of intent. Your post suggests that we are not clear on what we are trying to achieve and hence the conspiracy theory!
Ever hopeful that they will simplify. I would like to see government debt provided by way of an indexed annuity issued by government and less reliance on the foreign friends of the DMO That might allow the headroom allowing a less painful transition to something that works for the next generation rather like Japan
“they want trustees who represent the employee (typically union or the like).”
I used to be a union member – I was even on a branch committee for a while. One topic on which the union was utterly useless was pensions. It had a foreign policy – anti-Israel, in particular – but didn’t lower itself to do much about pensions.
Sorry to read of your experiences, dearieme.
In my experiences of industry-wide schemes for bus, coal and railways, the trade unions (and pensioner federations) provided (and still provide) excellent trustees.
We have a few union friends on this blog, on Pension PlayPen and more generally at the better pension conferences! But I fear they can’t get everywhere.
The argument about reviving the idea of company pensions as “deferred pay” is quite thought-provoking