The government needs to reset its policy focus on retirement outcomes and pension adequacy, says the co-chair of the Association of Member-Nominated Trustees.
The success or otherwise of private sector pensions, and the quality of ordinary working people’s lives after retirement, is always at the mercy of government policy.
Government policy, in turn, has tended to be swayed by how much influence the Treasury is exerting at any particular time.
The top priority should always be the retirement outcomes for ordinary working people but the interests of the Treasury and the financial services industry often seem to take centre stage.
Many of the problems we face today can be traced back to the 1986 Finance Act, which stopped defined benefit (DB) pensions from having surpluses greater than 105%. (When markets fell, this led to deficits – which in turn kickstarted the closure of DB schemes.) The act also introduced personal pensions and stopped the compulsory enrolment of employees into an occupational pension scheme.
To choose or not to choose?
If you believed the hype at the time, it was all done to give individuals choice. The argument ran that choice is innately a good thing. We must all opt for greater choice because restricting our choices must be limiting and therefore damaging to our free will and our consumer interests.
When it comes to pension provision, however, that is not always true. And choice isn’t always something we are allowed to have in other important areas of our financial life – try choosing not to pay your taxes!
The move away from DB to defined contribution (DC) has not been in the interests of many working people. When closing DB schemes and setting up DC schemes employers were able to choose not to contribute anything like as much into the staff member’s pension – an obvious bonus for the employer but a real downgrade for the employee.
Additionally, many members in DC schemes are given the choice (that word again) of how much they pay in.
Yes, you have choice. But what sort of a choice is it when you can choose to have a decent pension or to end your life in poverty? Obviously, that is not how marketing departments explain the situation to clients – but for many that will be the outcome of the choice they make.
Add in the fact that many people do not have the experience to deal with the myriad investment choices they are supposed to make, or the choices of annuities and drawdown when it comes to retirement, and the problem is compounded.
Refocusing on a decent retirement
My contention is that most people just want to pay into a pension scheme and know that when they stop working they will be able to have a decent life. Simple. However, to achieve this there needs to be a reset in focus on pension policy and it has to go back to first principles – to provide people with enough money for a decent retirement.
How do you define a decent retirement? The 2004 Pensions Commission concluded that people on an ‘average’ income would need the equivalent of two-thirds of their final pay as a pension. I believe that all policy decisions need to keep this front and centre.
For DB schemes this means keeping them open and returning battered accrual rates back to where they used to be. Many people who started off accruing at 60ths are now at 80ths, which leaves them needing to work for over half a century to get the pension they need.
It also means dropping the possibly well-meant but also fundamentally unfair recent proposal that surpluses should be returned to employers in a move to encourage them to allow pension schemes to put more investment into corporate Britain. The AMNT has been vocal in its criticism of this proposal and I’m pleased to say that it looks like government might be moving on this issue by consulting on sharing distribution of surpluses with pension scheme members.
DB schemes have provided the best pensions in the UK and it is in the government’s and workers’ interests to keep them going and to return their benefits to earlier, higher levels.
For those in DC schemes, again the aim must be for a target outcome of two-thirds of their final pay – which has little chance of being achieved without substantially more being contributed.
Finally, I am hoping that the new collective defined contribution (CDC) system will bring about a fresh start. For it to do so, it will need to focus right from the start on aiming for a pension of two-thirds final salary.
Of course, CDC cannot guarantee such an outcome, but it can certainly set out with that intention. When the multi-employer CDC schemes are established, the next great government project has to be finding a way to enable the millions of freelance, casual and self-employed workers, many of whom have no pension at all, to get access to the benefits of the CDC system.
Surely, after a lifetime of work, our friends and colleagues deserve a decent retirement. Government and opposition thinking should be laser focused on helping us to deliver that.
