Bob Scott, commented: “Let’s look at some recent stories and think how they could have been portrayed differently. In January, Carillion collapsed with a reported £900m pension deficit and more than 20,000 members of its pension schemes are set to fall into the PPF. Much is made of the fact that many members will receive lower benefits (or lower future increases) in the PPF than they had expected. But no-one seems to notice that, compared to what would have happened had Carillion collapsed before we had the PPF, members are materially better off. £900m better off in fact.
“Staying with the PPF – who recently reported a £6bn surplus of assets over liabilities and who, incidentally, have indicated that they are geared up to take on the Carillion members and liabilities. One press report didn’t focus on the PPF’s readiness to take on the Carillion members but noted instead that “another six similar-sized corporate failures would wipe out the lifeboat’s reserves.
“Separately, the politicians’ response was to haul the Pensions Regulator in front of the select committee and renew calls for swingeing fines for directors who “recklessly underfund their pension schemes”. Now, based on publicly available information (and there’s a lot of it on Carillion), it’s difficult to see what steps the Pensions Regulator could realistically have taken to make any sort of dent in the £900m PPF deficit, other than, possibly, pulling the plug sooner. But then taking such decisive action would no doubt have been contrary to one of the Regulator’s conflicting statutory objectives. So, what was a business failure, but a pensions success story, generates a swathe of negative publicity around all concerned: including the PPF.
“Auto-enrolment has been another success story. Mass coverage. Low levels of opt-out. Relatively painless increases in contributions. And what are the headlines: “Wages set to drop as workplace pension savings rise”. I hope that such headlines don’t encourage more opt-outs: the proof will be in the cessation rates post-April that I understand tPR will produce in due course.
“Returning to my theme, BHS – Sir Philip Green pays £363m to “fix” the pensions issue. No credit to the Pensions Regulator for their part in securing such a settlement; Frank Field continues his personal crusade against Sir Philip; and subsequent reports focus on the possibility that SPG’s contribution might “only” turn out to be £348m depending on how many people take lump sums instead of pensions.
“These are just some examples of ways in which pensions seem to get a bad press. That’s not to say that there aren’t things that could be done to improve pension provision – I will come onto those – but there is a perception problem with pensions all too often being seen as bad news.
“It wasn’t always like this. When I started work the UK pensions system was said to be the “envy of the world”. A relatively high percentage of the workforce enjoyed DB pension provision. Failing DC schemes were being converted to DB. And we were about to enjoy an unprecedented bull run in equity markets. What could go wrong?
“Well, something has. The Mercer Melbourne Global Pensions Index – research by Mercer Australia in conjunction with the Australian Centre for Financial Studies – shows that, out of 30 countries, the UK system ranks “C+” 15th out of 30 and in the third tier along with Germany and Colombia; and behind top tier countries (Denmark, Netherlands, Australia) and second tier countries (NZ, Canada, Chile). Looking in more detail, UK ranks 18/30 for adequacy; 16/30 for sustainability; and 5th out of 30 for integrity.
So, whilst the report notes that the UK could improve adequacy and sustainability by: increasing coverage and levels of contribution; restoring a requirement for retirement savings to generate income; and increasing State Pension Age; we do well when it comes to regulation, governance and protection.
“In my view, this partly reflects the fact that the UK government’s response to “events”, such as Maxwell, Equitable Life, BHS – fuelled by the reporting of such events in the media, is to apply more and more regulation across the whole sector. This may mean that members of pension schemes are better protected but the decline of DB has shown that such protection comes at a price – far fewer new and young employees covered by such benefits. Over-regulation also makes pensions more complex and harder for ordinary people to understand.
“Let’s look at some ideas. First, the government should take actions to help ease pressure on sponsors of DB pension schemes. The ACA’s Pension trends survey published last year showed that more than half of employers with DB schemes said that funding their scheme had a negative impact on pay rises for current staff. Other reports, including those by the Pensions Institute suggest that a significant minority of schemes will not pay their full benefits. Meanwhile, the RPI / CPI lottery continues, leading to a feeding frenzy for lawyers and other advisers as DB scheme sponsors, whose rules didn’t permit them automatically to switch to CPI in 2011, seek to find a different way to achieve the same outcome.
“I was disappointed that the recent DB White Paper gave no indication that the government was minded to introduce measures to help ease such pressures. Instead, just the promise of more regulatory intervention.
Although the PPF is currently in rude health it would be better if at least some of the currently stressed employers were not simply brought down by the weight of their pensions liabilities but that a way was found to restore both to health – albeit at a lower level of benefits.
“In my view, having a sustainable level of benefits, securely funded, is preferable to having a higher level of headline benefits underpinned by risky investment strategies; long recovery plans and stressed employers.
“In the private sector, most employers have chosen to replace their DB schemes with DC schemes as the only viable alternative. However, I was heartened to see that Royal Mail is working with DWP on what is needed to introduce a collective defined contribution “CDC” scheme. Such an arrangement, whilst not matching the previous DB provision, has the potential to provide more attractive benefits than the pure DC alternative that had been first proposed. The ACA worked with Sir Steve Webb and the DWP during the 2010-15 period on the “Defined Ambition” project – seeking scheme designs that provided more than basic DC but which stopped short of the bells and whistles of full DB. Although the Pension Schemes Act 2015 introduced a new category of schemes (shared risk) the necessary regulations have yet to be laid.
“CDC has wider application too – for example as a decumulation product in DC schemes. Traditional drawdown means either running out of money or spending too slowly so that many pensioners leave large amounts behind when they die. Collective provision can bring undoubted benefits here – the flexibility of CDC enables less stringent capital reserving than for deferred annuities; and exposure to growth assets can bring the possibility of higher benefits for the collective group. But, most of all, pooling of longevity experience means that people can plan their retirement spending without concern about spending too fast or too slow.
“Looking over the next 5 years my hope is that:
• politicians stop unhelpful tinkering with pensions;
• Where they do act, they make changes designed to make pensions more sustainable; and
• we have more ‘good news’ stories about pensions.
“Then perhaps the UK could start to move up that international pensions league table again.”
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