Plain speaker who raised awareness
Christine Farnish, the chief executive of the UK's National Association of Pension Funds (NAPF), has never been afraid to speak her mind. She caused a stir when she said that the proposals of the Pensions Commission chairman, Adair Turner, for a mandatory second pillar pensions scheme for the UK, evoked echoes of the Stalinist era.
She caused similar consternation when she suggested that the UK government should allow employers to renege on their pensions promises by removing the statutory indexing of pensioners and spouses benefits.
Yet Farnish, who is leaving the NAPF at the beginning of October to become public policy director at Barclays, has perhaps done more than any other NAPF chief to raise the profile of pensions and pensions policy in the UK.
In particular, she has provided a voice for the generation that will succeed the fortunate ‘baby boomers' who are now beginning to draw their pensions. She says she wants to ensure that this generation are treated fairly in terms of future pension provision.
This means providing a better alternative to the UK's parsimonious first pillar state pension provision, and ensuring that the UK's second pillar occupational system is sustainable.
The NAPF is pushing at an open door with these objectives, she says, since people in the UK are now far more aware of what they should expect, and not expect, from current pensions provision. "Increasingly today's consumers have a better feel for how paltry the state benefit's going to be when they retire and that they need to do something for themselves. That must be a good thing," she says.
The NAPF is a small organisation with a large constituency. Member schemes hold assets of around £800bn (€1,174bn) and cover 10m working people and 5m pensioners.
In the past two years, this constituency has voted against DB schemes with its feet. Three quarters have closed their DB schemes to new members, and replaced them with DC schemes, where employees rather than employers bear most of the risk.
To some, this Gadarene rush out of DB looks close to panic. Farnish agrees that some employers may have acted too hastily. "I'm sure that some of the move to DC was done too precipitously without really thinking through what the options were."
Yet this was understandable, she says. "We had the perfect storm, a situation when we suddenly shifted from a high inflation to a low inflation environment at the same time as we started to wise up on increases in longevity, and we had new accounting standards coming in, and the equity markets went through the floor.
"All of those things within the space of a couple of years hit company sponsors hard. Having not had to think about the pension arrangements for a couple of decades, they were suddenly finding that at almost every board meeting the problem of the pension fund deficit was on the agenda."
Farnish says that the problem was that when employers closed their DB schemes they also closed their minds to better alternatives. "That's the real shame about what's happened. It's not so much that final salary schemes have closed. With a more flexible workforce and the need for active ageing, and the fact that the long servers and the people in senior positions tend to get a disproportionate share of the benefits, there are better pension plan designs for many people.
"The problem is the alternatives haven't really been considered by many sponsors. Instead there has been a knee-jerk attitude of ‘let's get the hell out and let's do the least we can'".
Often the least sponsors will do is set up a DC plan. The risks of DC plans have yet to fully filter through to the public, Farnish says. "I suspect that when we've had more time with a DC system we will start to be more aware of the downside of individual DC saving, and the difficulties for individuals of coping with that sort of retirement saving mechanism.
"We will have to find different ways of doing things. Ways of sharing the risk in the system so that the individual doesn't bear quite so much on their own shoulders. Ways of collecting together pooled investments so that we can have large well-managed low cost funds that are properly diversified. Ways of dealing with de-accumulation at the far end, rather than expecting the individual to have to find their way through the jungle of the annuity market."
The National Pension Savings Scheme (NPSS) proposed by the Turner Commission was not the way forward, she says. When it was unveiled, Farnish described it as "sounding like a throwback to the Stalinist era, setting up a single monolithic structure".
Since then the idea has been modified significantly, she says. "If you look at the way that the debate has moved on since the beginning of the year you will see that even the government are no longer talking about an NPSS. That language isn't used any more. They are talking about personal accounts and targeted intervention, and they're taking about not doing anything that has adverse effect on existing pensions savings.
"This is a very different rhetoric to what was being said back in December and January, and I think the downside is looking a lot more stark than maybe it was in the initial euphoria with the Turner plan."
Farnish has suggested that the real purpose of the NPSS was to provoke the pensions industry to come up with something better than the NPSS. For its part, the NAPF came up with the idea of ‘super trusts' - large, not-for-profit, multi-employer schemes managed by experts legally charged with putting the interests of members first.
"We have been promoting the idea of multi-employer schemes for many years, saying that they were an excellent way of being able to buy good value, well managed benefits in small and medium sized organisations where it's been difficult for smaller schemes as well as the large schemes. But it's an idea that has fallen on deaf ears until quite recently."
The proposals that employers should enroll staff automatically into a pension scheme from 2012 should give the idea a kick start, she says. "The auto-enrolment notion really does enable multi-employer schemes to come to life. Because if workers are going to be auto-enrolled into a pensions system you might as well make it as good a pension system as it can possibly be."
Farnish believes employers must be given more flexibility in matters like indexation if the current level of occupational pension provision is to continue.
"If we want a system that's stable and durable, it's got to be possible for those that are paying for it to be able to have some control over the total cost."
Similarly, Farnish feels the new Pension Protection Fund (PPF) places an unnecessary burden on employers, and could accelerate the closure of DB schemes. "No employer in their right mind, who is shutting a DB scheme now and opening up something else for new entrants, would want to have any element of DB provision in their new scheme, because they would then be eligible for a PPF levy.
"One of the perverse consequences of PPF is the blighting of innovation in pensions designs where there's a much better balance of risk sharing between employers and employees."
Yet ultimately, Farnish believes that any attempts to re-design second pillar pensions depend on reform of the first pillar system. "We have a pathetically mean state pension underpin in the UK and unless you get that right it's very difficult really to talk about what you do with the funded system on top," she says.
"We saw the state pension as the starting point, and really fundamental and we spent a lot of time 2002 and 2003 working out what needed to be done to sort out the state pension system."
The result was the proposal for a ‘citizens pension', a basic state pension which would replace the complex system of pension credits and means testing with a single, simple universal payment, that would rise in line with average earnings.
The official response to the idea has been gratifying, she says, "The Turner Commission picked up many of our ideas and lot of our thinking has gone into the recent government White Paper. It doesn't go quite as far or as fast as we would like but I like to think that what we were saying on the Citizen's Pension has really influenced the debate."