Response to Long-term cost of LGPS holding too much (or little) to pay pensions.
PensionsOldie says:Inter-generational fairness is a big issue that should be considered in private sector DB funds as well, whether open or closed.
In establishing a DB scheme an employer vested funds with the trustees to meet the costs of providing the defined benefits for past (within the scheme), current, AND FUTURE employees. Similarly employees were also making contributions towards not only their past and current benefit accrual but also the expectation of future benefit accrual up to retirement or leaving pensionable employment.
In switching to DC pension contributions, the employer, and employees, contributions and the assets leave the company’s asset pool into the individual pension pots of the current employees only.
The existing pension fund then solely dedicated to the past employees and if estimated to be insufficient, the employer alone has to make up the shortfall out of its other assets over a very short period (compared to the expected lifespan of an open DB pension scheme).
The employer then loses the opportunity to use the fund, its investment income, and the benefit of member contributions to fund the pension rights of its future payroll. There appears to be little recognition in the decision making processes surrounding “end game” planning of the effect on the future employment costs and growth prospects of the employer.
We therefore have the obscene scenario of a quoted company with £1.1BN in its ring fenced pension assets and paying out pension benefits at a stable rate of £42M per year ending up 5 years later with a surplus available to the company of less than £100M after a bulk annuity purchase transaction and an investment policy targeting solely the BPA transaction (LDI).
The company also has a future DC contribution set at a rate which seeks to reflect the loss of the DB pension promise to its employees. What has that done to the value of the Company, and as repeated in many other employers to national growth prospects and financial institutions.
It is no less important in the private sector that intergenerational equity is considered as part of funding decisions, including the method of using existing pools of assets ring-fenced for pension provision. As a nation we need to ensure that [pension funds] can be used to enhance the pension prospects of future employees. To me it seems obvious that should not be by using them to pay DC contributions, either directly or indirectly!
Surplus DC should also pay future pensions, as they already do, and not be confiscated by IHT.
Alternatively, to be consistent, DB surplus might suffer a tax charge
DB surplus does suffer a tax charge when it is removed from the pension fund – it used to be 35% but the Conservative Government reduced it to 25% to encourage Company sponsors to pay the pay the tax. Otherwise the assets are transferred at an under-value to an insurance company, where all too often the tax on profits is taken by overseas Government.
Thank you but not a level playing field as the after tax surplus goes to the one who underwrote the contribution.
I would be very happy to pay25% tax on the “surplus” in the DC pot above £x where x is the indexed linked LTA. This net sum would be in my estate under my control.