With less than half of the UK’s working population in an occupational scheme and declining levels of provision for those who are, it is less a problem that is facing UK pensions than a crisis, said David Coats, head of the social and economic affairs department at the TUC. The three pillars of pensions provision are all to some extent under threat, he told the PMI’s autumn conference, held in London. Yet, should we remain true to the post-war ethos of shared responsibility or push for a benefits system structured around individuals taking more responsibility for themselves? The government’s overall objective to achieve a split where private to state provision is 60:40 respectively, has meant that the “notion of shared responsibility is under threat”. Coats also considered the retreat from defined benefit schemes in favour of defined contribution (DC) schemes. An aging demographic; the minimum funding requirement; FRS17 and a changing labour market have been oft-cited causes of the problems faced, said Coats, but are not in themselves explanations for the current crisis. Although there was much in the Pickering and Sandler reviews that the TUC would agree with, he had misgivings as to whether the reports were adequate to the challenges being faced, more specifically, at a time when both employer and employee contributions were falling. Education and legislative simplification were all very well, but missed the fundamental point that individuals would never be able to contribute sufficiently towards their retirement alone. Therefore it was left to the employers and government. The notion of shared responsibility “must be reinstated”. The argument for compulsion was certainly strong.
He agreed with the Pickering review that if a pension scheme was offered, participation for employees should be mandatory as a condition of employment. It would be necessary, said Coats, to save 15% of an employees’ earnings in order to achieve a decent pension, whether final salary or money purchase. The burden of contribution should be a 2:1 split between employer and employee respectively. He welcomed people working beyond the current state retirement age, but stopped short of compulsion.
But, do companies fully understand the true cost of their pension schemes, asked Donald Duval, head of corporate pensions consulting at Aon Consulting. Final salary schemes and money purchase (DC) schemes entailed different risks; but critically, if companies do not truly understand the costs of these risks, then it is a failing of pensions professionals.
Touching on risk impact and management strategies, Duval also raised the issue of whether companies would move to indemnifying their trustees in the event of poor investment strategies and the weaknesses of defined contribution schemes as an HR management tool. There are without doubt “a whole range of issues to make any self-respecting finance director, very twitchy indeed,” added Michael Fairlamb, head of pensions at Nationwide Building Society. Yet, DC was not the only way forward. He justified Nationwide’s decision to opt for a ‘career average revalued earnings’ (CARE) scheme. Ultimately it fitted the companies objectives more roundly, offering cost savings for the employer’ and producing a pension that was ‘liveable’. “How do you fight off an employee who comes to you and says, ‘I’ve worked for you for 30 years and this is all I am going to get out of it. I can’t live on that!’ A pretty big moral problem in my opinion and one which many schemes who have gone down the DC road are going to have to face at some future date,” said Fairlamb.
Regardless of scheme types, if you strip it down to the most basic issue, argued Graham Brown, pensions manager at Barnardo’s, were members actually willing or able to make choices. “By placing choice in front of an individual, we are pre-supposing that they have the ability to determine which of two or more options is right for them”.