John Mitchem considers a growth of liabilities from the elderly on the states of Europe
There is not space here to reproduce the 18 pages of this report but here is the overview.
The report deals with the particular problems of individual countries – Britain included. This is a debate will rumble on. To me, there is only one way we can afford an ageing population – growth.
It has got us where we are today and though we’ve taken a step backwards since the early years of this century, there is scope to step forward again. It is not good enough to say we will not afford demographic change, there is a need to afford it and it will come from progress in technology, like its done for 250 years.
The most efficient way to achieve economic growth is to reduce the employment costs of labour intensive employers, so that they can afford to employ more workers or pay their workers more.
In respect of pensions, DC contributions (whether into a savings pot or a CDC scheme) have the characteristic of being dead money to the employer and have the characteristic of a pension tax. I do not see many jobs promoted on the basis of high employer pension contributions.
Employment with DB pensions can be promoted on its “retirement wages”.
As DB is also a collective pension arrangement, the efficiencies of CDC, or rather the lack of the inefficiencies inherent in DC, also apply to DB – possibly even more so as the employer itself by providing the contingent guarantee replaces the need to service the CDC scheme proprietor’s capital. Surpluses built up in an open DB scheme automatically reduce the future employer’s employment cost without any loss to tax through the balance of cost mechanism. An investment return is earned on the scheme assets throughout the period until the benefit is paid. All this means these benefits are “localised” to the particular employer.
While an increasing number of employers (including those in the USA notably IBM and utility companies albeit using a different model) are re-opening DB accrual, another group are doing so or keeping schemes open for only a favoured group of employees. In the event of a surplus, the funds contributed by the previous larger group of employees are effectively being distributed to other employees.
Do Trustees not have a fiduciary duty to consider all distributions of pension scheme assets, whether that be to the profits of an insurance company, or to a group of employees who are not the successors to those who accrued benefit and paid contributions whilst in employment in the expectation that the DB scheme would run on?
When considering the future of the State Pension, all countries should consider the role of Pillar 2 occupational pensions and ensure they are being provided as efficiently as possible and not seek to turn them in Pillar 3 private savings schemes. Vested interests will of course lobby for their benefit whatever the cost to the individual or to society in general.