Only 790 employers pay into their own DC workplace pension.
What role do employers have in their staff’s pensions?
They are responsible to paying over contributions , enrolling and re-enrolling staff and choosing a workplace pension.
But nowadays the core functions of company pension schemes have been contracted out to a TPA or transferred to an insurer and the responsibilities of companies
Apart from the 790 who survive in TPR’s “pension landscape” , there are no employers running their own DC pension schemes for their current employers. It’s all contracted out.
Those who manage these “workplace” pensions have targets based on assets under management not income paid. There is no target for deferred pay anymore. The responsibility for employers to pay a retirement wage has is all but over.
Whatever became of deferred pay?
The further contraction of company pension schemes means more employers in multi-employer savings schemes that do not offer deferred pay. The new workplace pensions offer a capital sum and the offer of annuities and drawdown but this is a long way from the company pension paid through the employer’s payroll.
Is it any surprise that employer’s are walking away from what was known as pensions?
The big challenge for the pensions industry is to reignite the interest in “deferred pay” as what pensions offer. Otherwise, “pensions” will slip away from reward and into an extension of national insurance.
Employers had better started getting interested in value for money in what’s paid over to these multi-employer schemes. The recent work of CAPAdata suggests that if conversion factors were applied consistently to the capital sums arising from the various workplace pensions offered by insurers, consultants and the odd mutual, it would become obvious that some schemes are overpaying others – some schemes horribly under paying.
How will pension poverty become clear to the public?
Whatever happened to deferred pay may return and there will be three ways for this to become public;
- People’s workplace savings will be shown as the regular income that pots will buy (on the pensions dashboard).
- CAPAdata will start showing who is delivering VFM and who isn’t (this will be followed by the Pensions Regulator and FCA (in their own time)
- CDC pensions and guided retirement income from DC pots will reintroduce the idea of a pension rather than a pot.
It is only a matter of time till savers and their “their union representatives”, will be joined by consumerists such as Martin and Paul Lewis in calling out pension saving in terms of their pension outcomes.
It is an exclusive system, exclusive to good employers who take care of their staff’s welfare. There is 40% of our working population who are not earning the deferred pay and will be dependent to get by in later life on the state for income. That is not a good place to find youreslf.
Do we want a pension system that looks like this? This is what pension poverty looks like when you have no one left but the state.
This picture is of course a metaphor for pension poverty. It will not be literal for Britain but it is how social insurance works in India for those with no deferred pay for a lifetime of work.
In the states, most workers are not at all interested in the income their DC plans can provide. The majority do not have retirement preparation as a top financial priority. Median tenure of American workers has been less than 5 years for the past 7 decades.
Just as important, when the government mandated income disclosure estimates, they decides to require on an estimate that:
Didn’t project any additional accruals,
Retirement and commencement at age 67,
With single life and 50% joint and survivor annuities, assuming a spouse of the same age.
Such an estimate isn’t even accurate for a worker who is age 67 on the day of the estimate.
The better alternative would have been to show the account balance with an estimate of the required minimum distribution for all under the age of 73/75 (as appropriate), as if the worker were already age 73/75 today – to clearly reflect the small amount of income that would be provided.
Then, if they wanted to be fancy, they could have estimated the annual distribution amount if the worker saved 15% of pay for the period from today to age 73/75.
In America, most workers don’t annuitize, in large part because they either haven’t saved enough, or because of turnover, their assets are not in a single plan/program.
Many of these reasons not to pay income are common with the UK Jack. But we have the means to do something about it, as have other countries such as Canada and Australia.
We are moving along the same path but are at different stages of the journey. I would not like to be elderly and without a wage in retirement, but maybe that’s not how Americans think? What do you think BenefitJack?
I agree.
For Americans reaching traditional retirement ages, most would like to have a dependable income in retirement. All have the opportunity to purchase such an income via a single life annuity (SPIA), with or without a survivor benefit. That few do is no surprise – most recoil when they see the cost, in terms of the wealth they have to give up.
Lifetime income ain’t cheap!
Since 1945, the UK’s bedrock pension promise—tax-free contributions, tax-free growth, taxed extraction (EET)—has steadily eroded. The latest inclusion of unused pensions in Inheritance Tax shatters (again) the historical pact of generational wealth security, deepening a profound loss of faith in pensions. Trust has been eroded and will only get worse when cases get reported for deaths after April 2027.
John, I think you talk for a small part of British people.
Yes, for the ones who make the decisions about providing for their staff. Also for influencers like your darts player who can add very little to his pension after taper. The article implied he could make a significant contribution when it is only 0.2%
They also pay 34% of all income tax so being a few needs extra care not dismissed as unimportamt
The shame is that the jewel in the world of pension systems, the UK Defined Benefit pension system with its guarantee of an easily understood level of deferred income has been lost primarily due to legislation which has only considered risks not opportunities.
If CDC is 60% more efficient than DC in providing pension income for a given level of contributions then DB should at least match CDC in that efficiency (as administration costs are an annual cash outflow, in many cases borne by the employer, not reducing the future investment returns as in DC and CDC).
If an individual has multiple periods of employment, the DB pensions are cumulative, with those rights earned at a young age revalued to retirement reflecting cost inflation, even if they are no longer in that employment. This gives some level of protection not necessarily matched by DC in subsequent career brakes due to ill health, parental or other care commitments, etc.
The main reasons most employers have abandoned DB are:
• An over emphasis on yields in liability measurements applying short term movements to long term expectations, especially when that resulted in an assumption that the scheme would invest to lose money by tying the forecast to an investment return below the assumed rate of benefit inflation.
• A requirement for employers to double insure their guarantee by tying contributions to the assumed current cost of an insurance product, designed to generate profits for the insurer, at the same time as having to pay a default insurance premium to the PPF.
• Accounting disclosers that use similar transient liability valuation techniques to rank pension scheme deficits alongside the real and unavoidable liabilities of the Company.
• Excessive administration costs in meeting the ever increasing bureaucratic requirements of regulators and in focusing investment into products with complex and costly management structures.
• A culture that espouses consideration of risks and oppugns consideration of opportunities.
We really need to re-educate employers on DB, especially those with an existing pool of DB assets, not already transferred to an insurer, as to how they can be used to protect their business going forward:
• To consider their control over pension contributions into the long term future, considering likely impacts of the current consideration of pension adequacy by the Pensions Commission and others. How far that is being determined by the inefficiency of the DC pension system and whether that could be mitigated for the individual company by reopening DB accrual.
• Whether the most efficient way of obtaining benefit from a pension scheme surplus should be by using it to fund present and future contributions into the DB scheme:
o Easily (and at low cost) achieved by a simple Deed amendment after an employee consultation which is likely to improve rather than challenge employee relations.
o DC contributions are an employment term whereas Company DB contributions are on a balance of cost basis and can reduce,
o The Company continues to benefit from the investment return on all the pension scheme assets into the indefinite future.
o There is no loss to tax as there is with a surplus distribution to the company, even when that is used to fund DC contributions.
o Provided the defined benefits promised in previous periods of service are secured, there is no need to share the pension scheme surplus with previous employees,
o Similarly in the accounting disclosures, the P&A/c cost will be the DB current service cost, reduced by the interest on the surplus on the total assets, whereas the full employer DC contribution is charged to the P&L A/c even when paid into the DC section of the same scheme.
Unfortunately prejudices against DB built up in previous environments are difficult to shake off. As a nation we do need to challenge these prejudices and not always try to reinvent the wheel. That is not to say that CDC is not infinitely preferable to all parties that DC, even DC Mastertrusts, but we do have a heritage plus a pool of assets in DB pension funds that we could use far more efficiently in the national interest.