Kew

Agethangelou

McPhail

Please join us for our next online Coffee Morning  today Tuesday 26th August.

At our Pensions Commission relaunch event on August 5th, we heard the thoughts of those at Pension PlayPen have been delivered by Bryn Davies, Arun Muralidhar and Margaret Snowdon

You can read the Pension Commission Relaunch Discussion

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The second round table

Andy Agathangelou will be Chairing another round table with Tom McPhail and Simon Kew.

Collectively Pension Playpen would like to submit our thoughts that will be in line with the majority of our members (you)!

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A word from Steve Goddard and the team

We need to discuss high level content and ideas including:

• The triple lock; it has been hugely beneficial in improving the value of the state pension but it can’t go on and the political parties are trapped in a game of electoral chicken where no one can be the first to admit they’d change it. It needs a commission to give them..someone…anyone the air cover to make changes

• Pension tax relief. Same story; politically very difficult but it is an archaic system that makes very little sense in a post auto-enrolment world and it costs £70 billion a year. Anyone remember MIRAS?

• Public sector pensions. Now too far out of kilter with private sector pensions and also costing the government £50 billion a year; they are the cause of the most egregious inequality in our whole pension system. Others may disagree…

• The regulatory architecture of pensions. It makes no sense to have two different regulators, employing thousand and costing millions, both regulating defined contribution pensions.

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Should they be merged?

• Is 2027 too late?
• Self employed need help now !!
• Pension certainty in retirement (SELFIEs maybe)

We have had one submission from Pension Oldie

Pension Oldie’s input to our discussion.

I am very upset that I cannot participate in the interactive discussion on Tuesday due to a prior engagement but thank you, Henry, for profiling one of my points.

Although I won’t be there to explain these, I thought it might be useful if I put down some of the other points that occurred to me:

• Is the revised Pension Commission primarily concerned with retirement income?
• Since the first Pension Commission, the significance of the State Pension to retirement income has increased whereas the relative significance of occupational pensions has decreased.
  • Used to be a target of 2/3rds final salary from occupational pension plus a small contribution from the State Pension for those over average earnings, but which gave a much more significant contribution for the lower paid and those with limited pensionable employment history. Did this have equivalence to means testing the state pension?
• Should we now be targeting a greater relative contribution to retirement income from occupational pensions?
• If so, what is the most efficient way of providing retirement income from occupational pensions?
  • Probably, based on the analyses, this should be a collective arrangement targeting lifetime income, e.g., DB or CDC.
  • A Defined Contribution arrangement appears to be highly inefficient especially for the lower paid (shortened investment timeframes, proportionately higher administration costs, lack of incentive for trustees to achieve above average returns, critical decisions being placed on individuals ill prepared to take them etc.).
• The auto-enrolment regulations set minimum contribution targets for DC arrangements but minimum retirement income targets with no minimum contribution requirement for DB.
  • There appears to be pressure to increase minimum DC contributions – is this purely to overcome the inefficiencies of a DC pension arrangement.
  • The minimum retirement income target set by the auto-enrolment regulations is 1/120^th of average salary with Minimum Rate pension increases and pre-retirement revaluations plus spouse’s pension rights. (NB: Pensionable salaries like DC contributions can be capped at the N.I. Upper Earnings limit).
  • How do these two compare in adequacy terms (LCP’s analysis suggest that DC up to 50% less efficient).
  • For a representative employer, it appears that with targeted yields of c. 7.5% pre-retirement and 4.5% post retirement, an 8% contribution rate should fund the 1/120^th DB target benefit. However on a fully pen scheme these returns can be blended.
  • The outcome of the DC equivalent will depend on the relative performance of chosen DC provider (pre-retirement 5 times greater return over 5 years from the (small) best performing default fund at mid age than poorest performing – average is about 7.5% p.a. – Corporate Advisor 2024 survey). However the retirement income outcome will depend entirely on the decumulation options taken which under all the options I am aware of being suggested, remain a personal decision of the individual, even though a default may be suggested.
  • The outcome in all DC cases will depend on future market conditions whereas the DB outcome is guaranteed by the employer with a PPF underpin.
• For all but the shortest term arrangements, the investment return not the contributions paid in is the major determinant of the eventual outcome.
• It appears it was the disappointment that the investment returns projected in the 1970s and the 1980s did not materialise in the subsequent decades that caused many employers to abandon the “generous” DB pension promise (e.g. 1/60^th Final Salary).
• A second reason was the additional benefits legislation required the DB pension schemes to provide over those required when the required funding rate was previously being estimated – spouse’s pensions, guaranteed Minimum Rate pension increases, etc. Is the same legislative direction now being directed to DC pensions?
• DC contributions immediately leave the employer’s asset base, whereas DB pension scheme assets remain part of the sponsoring employer’s asset base. This gives the employer an interest in encouraging Trustees to achieve the best investment outcome for the pension scheme.
  • Will an open DB pension scheme with an employer’s guarantee be more inclined to invest in “productive” investments than a DC mastertrust (with its uncertain new contribution income and asset loss on transfer and to decumulation products). Is this a desirable from a national point of view?
• A DB pension scheme in surplus can support a struggling employer by temporary or long term reductions in funding rates, whereas DC contributions are a contractual commitment and can only be reduced by “fire and re-hire”. This makes employer failure more likely with DC.
• The “deferred remuneration” DB pension promise made for the employee’s service legally appears to outlive the method used to deliver that promise (consider the background to the Virgin Media case), and still persists after transfer from pension fund to an insurer. Are employers concerned about the resumption of their liability on the failure of an insurer charged with meeting that pension promise?
  • Is there an increased differential risk if the insurer is private equity owned rather than a mutual or a publicly quoted company and UK based or with non-UK ownership?

• What as a nation do we wish to do to address the pension needs of individuals who are not currently protected by occupational pensions (DB or DC)?
  • Encourage greater take up of occupational pensions? Employers offering DB pensions can apply differential (say age or salary related) employee contribution rates.  Similar opportunities in DC products result in loss of pension outcomes.
  • Consider what occupational pension options can be made attractive to the self-employed (e.g. multi-employer whole life CDC) and provide a legislative framework to support.
  • Use the tax system to encourage participation in occupational pension systems – in particular ensure that employers continue to obtain tax relief on their contributions into occupational pensions (so that costs of deferred remuneration are treated the same as current remuneration). NB: Salary sacrifice is of no benefit with salary related defined benefits.
  • Should we re-instate a second element to the State Pension with compulsory contributions but which can be avoided if “contracted out” into an auto-enrolment qualifying occupational pension?
  • How do we deal with individuals with employment gaps – e.g. State funding of contributions into the second element of the State Pension.
  • Do we need to work with ethnic and religious groups to ensure that occupational pensions (e.g. CDC schemes) can be designed to meet their beliefs.

Andy, Tom and Simon (who has worked with Baroness Drake) can all be regarded as industry “gurus” and are all appearing on a round table.

We hope you can join us

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