A beautiful gentle explanation about why pensions form part of pay from an American economist-minded “benefit-Jack”.
“If pensions are deferred pay, bosses shouldn’t allow a pay cut. … Of course the questions that employers could be asking their staff about what mattered most. Would it be the rate of income provided from the savings? Would it be the certainty of payment at the agreed amount or would it be access to the pot from which the pension was paid?”
Certainly, benefits (including pensions and retirement savings) are just another form of wages – ask most any economist.
Each of those outcomes, the pot balance, the rate of income, the certainty of an agreed (monthly) amount are all available – regardless of whether the plan design is DC or DB. Either/both can provide for those payout forms. The only question is who is to decide on the desired guarantee (pot balance, rate of income, certain monthly amount), and who is to pay for that guarantee.
Of course in a perfect world, employers should take all decisions on pensions as a staff benefit with due diligence. In practice they can and will take short cuts, simply signing up to auto-enrolment or in future to the default offered by their workplace pension as a solution that is recognised by regulators (FCA and TPR) as compliant with the Pension Schemes Bill.
Some employers will go further than others but no employer should be happy to see second rate decumulation offered to staff or ex-staff drawing what they consider their pension.
The Government has got a challenge ahead of them. There has been work done on VFM in accumulation and it’s ok if rather challenging for consumers. There has been little work done in the private sector about VFM for those decumulating (spending) their pots as pensions.
This is a serious matter that needs attention. We are talking with organisations about what they are doing and finding there is very little agreement about what will happen from 2027. We intend to think of the needs of the consumer which we regard as three-fold
- To have an income that lasts as long as they do (aka pension)
- To get value for money from that income
- To get access to this income PDQ but not later than 2027.
Of course there is a lot to come. There is a debate about the rate at which pension is paid, the security of that income and the flexibility of the pension to offer lump sums or even a single payment if requested.
We need a VFM measure that can be sophisticated as you like for professionals but which is as simple as single numbers marking the offering to savers by way of pensions.
We need employers to take pensions more seriously, to consider them as deferred pay and compensation. It’s legal and economic sense!
Thanks to Benefit Jack for bolstering my endeavours! I hope that this clip from his CV tells you what he’ about – and what Value in the workplace should be about.
