I asked a question of the Pensions Minister yesterday. I had been asked to ask it by the Finance Director of a large employer (more than 20,000 staff) with most in a DC workplace pension. He told me that he was being “harassed” by workers who were being put up to it by his main union who thought he could do better with the promise of a wage in retirement.
We went on to discuss this in more detail. The Union is telling staff that the workplace pension is a lie and that there is no income from the pot people get at retirement. The FD didn’t question this but pointed out that he was quite capable of turning a pot into what he wanted -financial freedom and he didn’t see why his staff couldn’t do likewise.
It seems that the Union is also suggesting to staff that they can go back to getting pensions as they used to do when they could be in a DB pension. It turned out that the FD thought that what the Union were suggesting was DB and I explained that CDC is not DB – certainly not from the FD’s point of view and that for his P/L and Balance Sheet , paying a set amount into a CDC plan was no different to paying into the DC plan already in place.
But this was not enough for the FD and he said he’d like to have a word with the Pensions minister and ask him what he could do to counter the lies from the Unions that staff could have back their pension and a better pension than could be had from the DC pot and the lie that this wouldn’t cost the company any more. I do not kid you – he used the word “lie”.
I mentioned that the following week I would be going to see Torsten Bell and would ask him the question in front of 500 workers. We agreed that I could ask the question so the FD could have an answer to the Union and to his staff who were bringing the message to him.
Which is why I got to ask the first question to the Minister where I said that I was representing a big company who under pressure from its union was being asked to switch from DC to CDC. I went on to ask the Minister what he would say as an argument to the unions to save the FD having to pay more attention to his pension.
The answer from the Minister, after a bit of waffling was to advise me to “listen to the people” which seemed a fair enough way to avoid answering my question – what with 500 people in the room , most of whom know nothing about the problems of ordinary “working people”.
It is of course the right thing for the FD to do because the Union is not bringing him a problem but an answer to the problems workers have when they retire. They get a pot of money which does not pay a pension and the unions have clocked that a pension from CDC will pay as much as 60% more pension than a pot can. The Union calls the pot a mis-selling of a pension -that of course didn’t make sense to the FD but as a 64 year old with a big pot, I think the Union have a point. It is the nastiest hardest problem in finance (Bill Sharp) to turn a pot of money to a pension. It is a lie to say that a pot is a pension.
So I will go back to the FD next week and send him this blog today and I will explain that the Union is not going to ask him to pay more into pensions (unless its part of wage negotiations) and they will make it easy to transfer from DC to CDC (because a union did that for 120,000 members at the Royal Mail without fuss from the workers).
I can’t say that I am in a union or that I am on the board of a large company. But I can say that I intend to be offering a CDC scheme for employers who accept that CDC pays more deferred pay to staff than a DC pot can. I can promise support from union people both within my organisation and without. I can promise that the cost of moving from DC to CDC will be minimal (some operational cost at start).
So I hope that in time I and the FD will be friends, just as I and the Unions are beginning to be. Because this really isn’t the story of confrontation that the FD thinks it is and it’s not a struggle with an unreasonable man, that the Union members think it will be. It is something that we need support from Government to get over the line and difficult as it seems for a politician to speak his mind in front of 500 people, I think Torsten Bell did just that!
We should listen to the people – who want a pension and not a pot – when they get to retirement!
I wonder what rate of employer pension contribution your FD contact is currently paying?
If it is the auto-enrolment minimum of 3%, I guess he is in for a rude awakening. After all the previous Pension Commission suggested a minimum total contribution of 12% (like Australia), but unlike Australia it was originally suggested this should be shared equally between employees and employers (i.e., a minimum employer contribution of 6%). A doubling of the employer contribution rate.
If we do get to 12%, or his company is already at that level, and with the assumption of a long term investment return of 6% p.a. (only marginally above the current long dated gilt yield of 5.8%), a 12% contribution should fund a 1/80th inflation protected DB pension for a workforce with an average age profile. While CDC will provide slightly poorer outcomes due to impact of costs being borne out of the fund, it will be not far short of that. I leave those with greater knowledge of DC to project the equivalent annual pension, effectively reducing by 2.5% each year in retirement. All this with no change in the cost to the employer and without any guarantee obligations other than to maintain the contribution rate.