Yesterday I sat through a day in the City listening to insurers talking about the safety of giving them your money while everyone else wanted to talk about what to do with the surplus funds not needed to pay the promised pensions.
Meanwhile, over the other side of the City of London, Jonathan Guthrie was getting ready this epic read which reminds us, what this blog has said for several years, that pensions schemes owe their members the best possible pensions!
Here are some excerpts, if you are an early bird you can get this read for free, if not – you can contact henry@pensionsmutual.co.uk and I’ll send you his golden words! Here’s the free link .
We may be in what the pensions industry calls the “end game” but defined benefit schemes are still very real for most of the people in this country lucky enough to have been in one (or more) as a result of the work they carried out.
The schemes already provide a fixed pension for life to white collar toilers past and present, not just foundry and factory workers.
The income is guaranteed by a current or former employer. The promise is backed by investment funds. These have accumulated surpluses in excess of their liabilities totalling some £160bn according to one government estimate.
Reforms expected to become law in April would let funds release some of this cash. The second chart shows the value per member of surpluses at different levels of scheme funding. The numbers are eye-popping by the modest standards of average pensioner incomes.
For example, schemes with assets amounting to more than 140 per cent of liabilities are sitting on excess funds averaging £50,000 per member. The figure is £10,534 per member for the largest group, which is served by schemes with surpluses of 105-110 per cent.
A big caveat applies. The money does not technically belong to members. Nor can sponsoring employers automatically grab it all. Pension schemes are run by trustees on behalf of members. Trustees may be members themselves, company executives or independent professionals.
Sponsoring employers are likely to see surpluses as “overpaid contributions,” says Lynda Whitney, a senior partner at consultancy Aon. To members, the money may look more like
“deferred benefits” but m in practice, the use of surpluses will involve a negotiation between trustees and the company.
” My hunch is that the starting point for many of these haggles will be a 50/50 split”.
You can see how well the Stagecoach trustees did for their bus-driving members when you discover the members are getting 2/3 of the Stagecoach pension fund’s surplus.
Guthrie is quite brilliant at reminding us of how members have benefited from surpluses in good time.
In the past, pension funds sometimes reduced surpluses by increasing members’ monthly payouts. Younger members will like the sound of that. Older ones will object that their lower expected longevity reduces the value of such increments.
This reminds me of arguments over the SPA and pension increases. There are various vested interests at work – something that Steve Webb always picks up on.
This is one reason why surplus distributions will most likely be via lump sums, according to Sir Steve Webb, partner at Lane Clark & Peacock, another consultancy.
Moreover, “companies will prefer a method that does not create more long-term liabilities”. Much of the well-intentioned paternalism that inspired defined benefit pensions lingers in the way they are run.
But as BP’s pensions (and other well organised pensioner memberships) know only too well.
Ordinary members are not expected to play a role in surplus negotiations.
There is a long section at the end of Jonathan’s article that looks at the legal ins and outs of sharing surpluses. We had a lot of that yesterday at Professional Pension’s excellent end game conference. I won’t rehearse but cut to the chase. This is all very well for the “haves” but what of the “have nots”?
Members of low-cost defined contribution pension schemes — which now dominate private sector workplaces — should meanwhile wonder why they are being left out. They could legitimately ask for employers to funnel a portion of surplus repayments into their pension pots. No rule forbids such top-ups, according to Tiffany Tsang, head of defined benefits at Pensions UK, an industry body.
If you don’t ask, you won’t get.
If Jonathan included “collective defined contribution” in his comment on workplace pensions, I’d totally agree. We are in an era of negotiation, unions are waking up and so are many members who have pots big enough for it to matter. I mean by that every body!