I have read the Pension Commission report and I have called it boring in the way that AI written reports can be. Much of the personality of the 190 pages has been removed and replaced by the bland language of consensus.
Despite that, the underlying gist of the Pension Commission is that things aren’t working and they need to change,
How a large and complex employer reacts to the PC report.
Monty or Muntazir
Monty Hadadi picks this up in an excellent post that talks of the challenges to large private sector employers who will need to lead the way. I understand that not only does First Bus manage busses with bus workers but it employs more people to run trains. He therefore sees his people in his own DC scheme but also in the Railpen dangers and as usual there is a DB scheme in place for older First Bus workers, many of whom are now retired. To suppose that large travel companies run simple pensions is to ignore the reality that most of travel is run on franchises where your ownership of people’s labour is transitory, you will win and lose franchises.
Remember this when reading Monty’s reaction to the Pension Commission.
Two key messages from Monty
- That this will be expensive for employers in the long term
- That pensions are the way people “exit work” when they retire.
This is a message that I hope that will be amplified til it hits the boardrooms of our largest private firms. Employers must start taking responsibility for people’s retirement and to do this , they will need to reorganise pay and the retirement wage. This is a subtle and short message.
I agree that employers have been lost out of much of the consideration regarding pension provision.
For the past 30 years, employers have been regarded as a magic money bank to support DB pension promises. This has been particularly pronounced since 2004/2006 when they have been double hit with deficit recovery contributions which have assumed that the pension fund built up over many years will have to be sold at the valuation date to purchase insurance company profit generating bulk annuities. At the same time having to pay an essentially similarly calculated levy to the PPF which has been heavily weighted against smaller and labour intensive employers. The effect has been that the mutual fund built up jointly by employer and employee contributions has been force fed to insurance companies and an over-jealous advisory industry ever keen to sell their services to encourage the ever increasing bureaucratic exhortations (sorry “Guidance”) of a Regulator that has lost half the schemes it was supposed to protect.
Now employers have auto-enrolment contributions into highly inefficient DC pension pots, which surprise surprise result in considerably reduced pension income. The result is that we now have a Pension Commission having to consider how to address the societal issue that arise. While contributions into a CDC scheme will undoubtedly substantially improve the efficiency of both employer and employee contributions, employers have lost any interest in the performance of the chosen scheme and are likely to regard to regard the contributions as equivalent to an employment tax.
I would strongly urge all employers to become self interested and consider in what way their pension contributions can contribute to their business. In this respect consider the real costs of a guaranteed Defined Benefit promise going forward. The present auto-enrolment minimum accrual rate (for an inflation protected pension with spouse benefits) on an average salary basis is 1/120th of pensionable pay of band earnings Based on an example employment profile (with perhaps a higher than average age of employees) and an assumed long term future investment return of 6% p.a. (the average investment return of open DB and default DC accumulation arrangements over the past 20 years has been more like 8% p.a) the cost of the 1/120th pension promise is close to the current 8% minimum auto-enrolment commitment with the majority of that paid by the employees. Whether 1/120th provides an adequate pension in retirement is perhaps an issue the Pensions Commission should consider, but should recognise that it is better than the 1/180th which the 8% contributions into a DC scheme are likely to provide, and which seems to be the basis for the “pension industry” seeking to justify increased contributions as the answer to “adequacy” issues.
In the “balance of cost” arrangement of a DB pension scheme, it is the employer who gains the benefit of an over forecast investment return on the full fund including that built up by employee contributions as well as its own (the employees benefit from having a guaranteed defined benefit promise underwritten by the PPF). If an employer has an existing pool of assets in a DB pension fund, the investment return on that pool can be returned to the employer by way of reduced future employer contributions thereby reducing its employment costs without any loss to tax or an active decision by the pension scheme trustees to share the surplus with past employees.
Are employee benefit and pension advisors, actuaries, and regulators impartially advising employers on these matters or is there too much “skin in the game” in promoting considerations of the “End Game” for DB schemes?