Connected Research

Union policy research in the 21st century

Posts Tagged ‘Defined contribution

CBI on public sector pensions

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The CBI has put out a report today on public sector pensions (press release; report).

The CBI claims to speak for businesses which ’employ around a third of the private sector workforce’ and to ‘communicate the British business voice around the world’. So, I’m almost tempted to ask ‘what has public sector pensions got to do with you?’ – except, of course, that decent quality public sector schemes highlight the decline into sheer inadequacy of pensions provision across much of the private sector and may also – in somewhat better times – act as a source of pressure on the private sector to improve its own levels of provision. So, the ‘voice of business’ has indeed a very clear reason to intervene in the debate on public sector pensions.

Aside of the usual prejudice in the report – for example, the continued misuse of the total size of the deficit in public sector schemes, as if bill had to be paid now rather than amortised over a period extending well into the future – what is the CBI actually saying should happen to public sector pensions?

No changes to existing accrued rights – that’s clear. But, for the future, what it wants to see is higher retirement ages for all staff, not just new joiners, and for all public sector workers to be moved off defined benefit provision (including career average schemes). Funded schemes (within this context) would be able to choose their own route, while those in unfunded schemes would be shifted into a new type of provision called ‘notional DC schemes’. Here, contributions are built into a series of personal accounts but, instead of being invested in the stock market, are revalued in line with rises in earnings or prices before being used at retirement to buy an annuity.

The CBI doesn’t state what sort of pensions it expects these personal accounts to buy. Over time, and taking a long-term view of pensions investments, simple revaluation is, however, likely to lead to much smaller individual pots than even a ‘conventional’ DC scheme invested in a range of types of investment commensurate with an individual’s age and risk profile. Consequently, notional DC schemes are likely to lead to much smaller pensions.

This leads me to a couple of points:

1. Why does the CBI expect public sector workers in unfunded schemes to have retirement pensions which are substantially poorer than existing DC provision?

2. As a society, do we really want the burden of paying additional state benefits to people unfortunate enough to be in such schemes? The switch to DC schemes in the private sector is already loading the state with additional, and unpredictable, burdens in the future as a result of the pensioner poverty that will be the result; do we really want further burdens from forcing public sector workers into even poorer schemes?

Having a majority of public sector workers in these sorts of schemes would certainly alleviate the potential comparative pressures on private sector employers. Establishing poorer pensions provision into the public sector increases the relative attractiveness of private sector employment – and at no extra cost. It also underpins the removal of the ‘burdens’ on business of decent pensions provision, since it helps to establish existing ‘conventional’ DC provision as the standard. (The burdens on the taxpayer of having a greater number of pensioners reliant on the state for income, and the concomitant reduction in available money to spend on CBI members’ goods and services, is perhaps a concept too far removed from the CBI’s preoccupations and thinking.)

Whether this would lead to private sector employers following suit is uncertain – and perhaps unlikely, since private sector employers are largely interested in containing costs, and switching to ‘conventional’ DC provision tends to do that within existing arrangements establishing pension contributions at fixed levels. So, this move is unlikely to form part of a further general spiral of decline on top of that already in motion. If employers did follow suit, however, it is interesting that the prospect of such poor pensions in comparison with even existing DC schemes is likely to increase pressures on those employers who had gone down such a road to raise contribution rates, since this is one of the few variables that could be changed to improve the eventual outcome.

[Same day edit: The FT‘s report of the story carries a reference to there being a cash balance element to the CBI’s proposals (in which the lump sum that members receive on retirement prior to conversion into annuity reflects a percentage of pay for each year worked, revalued in accordance with prices or earnings). If true, this would alter some of the emphasis of the last half of this post – since the pensions thus generated would be better than it envisages (while remaining poor). However, while the CBI report refers to cash balance schemes at an earlier point in the text, I can’t see there being a cash balance element to the way it writes up its proposals for a notional DC scheme (and, anyway, if it’s intended to be a cash balance scheme, why call it ‘notional DC’?]


Written by Calvin

06/04/2010 at 12:42 pm

Future pensions: the view from the NAPF mountain

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A state pension worth around 1/3rd of average earnings to provide a robust floor of benefits, supplemented by a workplace pension built around auto-enrolment and mandatory contributions, the whole supervised by a new regulatory settlement based on a standing Retirement Savings Commission analogous to the existing Low Pay Commission.

That’s the vision of the National Association of Pension Funds, the industry body representing scheme sponsors, in Fit For the Future, a new report on pensions published yesterday (press release; full report). Praised by the TUC as offering ‘serious and constructive proposals for the future of pensions‘ there’s a lot in the report to commend, as well as some items for debate.

It’s hard to disagree with the NAPF’s view of the pensions landscape: workplace saving has fallen dramatically both in terms of numbers and in terms of the value to ordinary workers of the pensions generated there. Rightly, the NAPF doesn’t spend too long analysing how this situation has come to pass, but is oriented more towards what can be done to stop the decline and get the principle of workplace saving back on track.

There are many factors which help to account for why this situation has come to pass, as these pages have already argued; though it would be perhaps rather churlish in this context to remind that decisions to close schemes appear to stem largely from the unsympathetic and ruthless cost-cutting actions of scheme sponsors themselves. The Connect Sector of Prospect has some experience of negotiating alternatives where employers are looking to move away from defined benefit provision; outside this experience, that employers have tended not to stop anywhere in the middle of the pensions continuum but have leapt straight from defined benefit to defined contribution is less of a reflection of the lack of risk-sharing alternatives, as the NAPF directly suggests, than of the realities of employment relations in the 1990s: employers have done so because they can; and because the will to do something more creative (but evidently more costly) has not, except in a few, admirable cases, been found.

Despite the acknowledgement that ‘workplace pensions remain central to providing people with an adequate
retirement income’ and that workplace provision is ‘at the heart of good pension provision’, the central role in the NAPF’s vision is occupied not by workplace saving, but by a beefed-up state pension scheme – perhaps rather surprisingly, for an organisation representing (workplace-based) scheme sponsors, but perhaps a reflection that what has been lost will be hard to replace other than by slow incremental steps, starting from the 2012 reforms. Even within the context of workplace savings, the primary place in the NAPF programme is taken by a suggestion for a maximum of twenty ‘super trusts’ whose role would be to offer members of small schemes the low charges facilitated by the benefits of scale – a worthwhile, and supportable, idea alongside the NEST but whose contribution to revitalising workplace provision might well turn out to be less than dynamic.

Other suggestions from within the workplace savings context include offering ‘core’, unindexed pensions to scheme members only (it seems to me that indexation is an under-appreciated pensions benefit; while a focus on the scheme member only might be supported when retirement is far away, but deeply regretted once into retirement since ensuring loved ones are provided after your own death becomes much more important the closer you get to that point); improved mandatory contributions to the NEST (definitely supportable); better advice to accounting standards bodies on accounting for pensions (likewise); and a new statutory objective for the Pensions Regulator to promote good pensions provision (clearly a good idea).

So, there are some worthwhile things to explore in this document and the NAPF is to be congratulated for putting it out. It would be a shame if its publication at this point in the electoral cycle led to its many good ideas being lost to public debate. Nevertheless, in the meantime, I’m reminded once again that quality pensions expanded and became more beneficial at a time of labour strength; their contraction at a time of labour weakness simply proves that advances in benefits have to be won by collective action and are not given away by employers for free.

KCom pensions review

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KCOM is to begin a consultation exercise on a harmonisation of the Group’s ten different pension arrangements into a single, newly-created and Group-wide pension scheme for all employees. The proposal will, at the same time, close all the existing schemes to future service.

We firmly believe that KCOM Group has a responsibility to maintain the long-term promise it has made its employees to provide decent pensions. We would always advocate a rational response to proposals such as those which have been put forward, but we would not accept that this means putting up with severe detriment.

Prospect, which has already met KCom on the proposal, will continue to be active in the consultation exercise and is urging all Prospect members in the Group to read all the documentation, review their own pension situation and also to take an active part in the exercise.

In the meantime, Oxera Consulting today published a short review of defined contribution pension schemes in the financial crisis. Largely aimed at reviewing the policy responses in central and eastern Europe, the document is very good on the difficulties that are posed to individuals faced with the need to make investment decisions as a result of membership of DC schemes, and of the social jeopardy resulting from people retiring at different points of the economic cycle with the same contributions record but entirely differently-sized pots. It also makes the very good point that, for all the problems associated with higher-risk investments, the long-term return from equities is much higher than with safer forms of investment.

Switching increasingly into less risky investment vehicles is vital to protect capital in the run-up to retirement – but those needing to draw shortly on their pension, for example, those who would ordinarily have been looking to switch into safer forms of investment say in March 2009, would have been placed in the invidious position of having to consider whether, in contrast to this basic advice, to gamble on staying with equities in the hope of the stock market rebound. Over the course of 2009, such a rebound did happen, but its timing and extent were evidently far from clear at the outset. Playing with spare cash in that situation is one thing; playing with your retirement savings is entirely another.

As more schemes switch to DC-type provisions, there is a need to consider DC scheme design so as to achieve some means of a targeted level of pension benefit, not least in the (deliberately extreme) situation highlighted in the Oxera report. It has always been possible to design some form of targeted benefits underpin, with this re-appearing most recently in the collective DC approach which, although not fault-free, did at least offer some means of getting around the potential timing-based unfairness of DC and of sharing the risks associated with this form of provision more evenly between scheme members. The DWP has withdrawn from the idea of collective DC but it’s certainly possible to design on a private basis a DC scheme to suit such characteristics as are appropriate both to scheme members and to the companies offering them, so as to create a DC scheme which is both more fair and more balanced. The question remains one of whether there exists the will to do so.

Written by Calvin

22/02/2010 at 5:52 pm

Collective DC schemes – DWP speaks (softly)

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To very little fanfare (to whit: no press release), the DWP has published three documents on how collective DC schemes might operate in the UK.

Collective DC schemes are a Dutch invention and their potential applicability in the UK, encouraged by particular proposals from Hewitt Associates, first came to light in 2008 during the DWP’s continuing examination of risk sharing in the pensions context. Essentially, a collective DC scheme is a pooled investment vehicle based on a particular set of target benefits, paid for entirely by the employer, with employees paying additional contributions for an improved set of benefits. This type of arrangement also potentially lends itself very well to quality governance arrangements based on a board of trustees. In the shift from defined benefit to defined contribution, collective DC has something to offer and Connect earlier welcomed the opportunity for their further exploration, albeit outside the specific context of risk sharing.

The DWP ‘package’ consists of a summary document, a modelling of the likely operation of collective DC schemes in the UK and a research report into employer attitudes, including the scale of likely demand. The conclusion is that the government needs to take no further action, not least since the positive outcomes of these sorts of schemes in some areas are, the DWP concludes, outweighed by the drawbacks – while employer demand is likely to be limited.

The latter is, of course, a key criterion. The DWP’s research here concludes that employers have different approaches based on the the type of scheme currently operated but that, overall, demand would probably remain low:

– sponsors with open DB schemes considering closure and employers that had already moved to a DC scheme would not consider collective DC on the grounds that the additional costs compared to a DC scheme were not justifiable [that says sufficient!]

– employers with trust-based DC schemes were reluctant to add to trustee duties since trustee recruitment would become more difficult [hmm]

– employers with contract-based DC schemes who would like to deliver a better pension to their employees might, however, consider a collective DC scheme, especially if these became the expected norm.

This overall conclusion is something of a shame, since collective DC schemes do offer a more beneficial approach to pensions saving than ‘pure’ DC, while remaining of the DC type – i.e. they contain no guarantees that the ‘targets’ for the retirement benefits will be met. The ‘collective’ approach is evidently attractive in a trade union setting – although one of the reasons for the DWP’s conclusion is that the dangers of inter-generational cross-subsidy might lead to perceived unfairness – while, as Kay Carberry, Assistant General Secretary of the TUC, has argued this morning, collective DC does potentially offer something towards the fundamental need to improve governance in DC arrangements (many of the hard-fought-for improvements in pension scheme governance is endangered by the sliding away of DB schemes).

Nevertheless, it is the employer approach to costs which is the key. An employer-only contribution of 12% (and for a not particularly attractive basic benefit of a 1% career average scheme and retirement at 68) represents something of a ‘challenge’ to employers making an average contribution into DC schemes of just 7.00% (albeit that this figure is rising). As always, the scale of contribution that an employer is prepared to make is the acid test of its intentions – and, it would seem, a contribution of 12% lies beyond where employers are – currently – prepared to go.

Challenging that – and pushing that boundary further – will be a key task for unions and employees as the economy improves. Exposing the inadequacy of pensions based on an insufficient contributions structure will be a major component of that, in which the structures and benefits provided by a collective DC scheme might play a useful comparative role. In this context, I hope that the concept is not entirely dead.

Written by Calvin

16/12/2009 at 1:12 pm

NAPF 2009 survey: urgency required

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The National Association of Pension Funds has today published its annual survey of its members (press release), this year based on 300 responses covering schemes with 8m members and some £410bn in assets.

I’m usually a little wary of citing ‘doom and gloom’ stories in this context: they increase the pressure on good schemes, and particularly on members of good schemes, both in the public and the private sectors; and, in a situation of particular instances of consultations on closures, allow employers to claim they are moving ‘with the market’ (they would probably claim this anyway, but an evidence base always lends greater credence to such a claim).

Nevertheless, the NAPF is right to call for ‘decisive government action’ to support schemes remaining open. Some 82% of NAPF members want the government to issue more long-dated gilts and index-linked securities; this would reduce the pressure on schemes by reducing the value of their assessed liabilities, consequently moving them closer to a position of balance between assets and liabilities, and would provide some level of encouragement for those determined to stick by quality occupational provision. Joanne Segars, NAPF Chief Executive, has called on the government not to ‘miss the opportunity’ of its Pre-Budget Report to ‘make a difference’ to schemes in this way. Such a strong voice from the pensions industry is clearly worthy of detailed consideration.

Almost as high a proportion of NAPF members (79%) want greater flexibility in setting scheme indexation levels or in scheme normal retirement ages. I’m not convinced that changes to scheme indexation would make that much of a difference, frankly, but changes to schemes’ normal retirement ages would seem to be a pragmatic response to increasing longevity in retirement and, where carried out in full consultation with scheme members and representatives, guarding against the exploitation by employers of the current recession-hit environment, are at least worth considering as a means of keeping decent schemes open.

The alternative – almost overwhelmingly poorer DC provision – remains a substantially unattractive one, although one of the positive conclusions of the NAPF report is that DC contributions do not, at least at the level of the average, appear to have been cut in the recession – despite some well-publicised instances. (Perhaps it is a sign of the times that there being no change, and thus no cut, is a positive message.) Even so, contributions at an average of 11.5% (7.5% employer; 4% employee)  remain substantially below what is necessary to deliver an adequate pension in retirement, still less the level at which broadly comparable benefits to DB provision could be achieved – even in theory, given their shift in the risk of investment returns and poor annuities entirely to members.

For its part, Connect has also called on the government to do more to keep schemes open – not least in our prop to this year’s TUC (composited in Composite 10 with those of other unions and overwhelmingly supported by delegates). At the same time, however, it is also incumbent on companies to prove that any moves away from DB provision are not opportunistic cost cutting – something which could be achieved by instigating enhancements to their DC schemes which provide a real, and valuable, alternative. More (much more) needs to be done here at home, too.

Written by Calvin

27/11/2009 at 1:26 pm

Pension scheme membership – ONS figures

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The Office of National Statistics has today produced figures on the level of membership of occupational pension schemes, using figures drawn from the 2008 annual survey of occupational pension schemes.

The headline figures are that, within the purview of the survey, there are 27.7m members of occupational pension schemes in the UK – though this includes both active and deferred members (in respect of the latter of which there may be some double counting in the figures since an individual may be a deferred member of one scheme and an active member of another) and current pensioners. Of this total, there are some 9m private and public sector employees currently contributing to pension schemes, while there are 8.8m current pensioners and 9.9m people with future entitlements.

(By the way, pension schemes are not so-called Ponzi schemes; i.e. they do not depend on a continual stream of incoming members (and contributions) to pay the pensions of existing pensioners – although ‘mature’ schemes, where the scheme is either closed to new members or where the membership profile is much more towards pensioners than existing members, often find it necessary to adopt much more cautious investment policies, resulting in lower returns).

The survey also reminds us that defined benefit schemes in the private sector have higher contribution rates than do defined contribution schemes: the average total contribution rate (both member and employer) for open defined benefit schemes in 2008 was 19.7 per cent, compared with an average of 9.0 per cent for open defined contribution schemes. Furthermore, the figures also seem to show that the current woes of pension schemes are very much reflective of the times, and that closing schemes is not a money saving measure: closed DB schemes had an average employer contribution rate of 18.1%, compared to 14.6% in open schemes.

There are of course some holes in the figures – the ONS itself points out that the figures exclude those in personal pensions, including group personal pensions (GPPs) and stakeholder pensions. Nigel Stanley over at the TUC has today done a very good job in highlighting this shortcoming in the figures (as well as engaging in some useful agenda setting in terms of how some of the nuances of the figures might otherwise have been reported).

Nigel’s point on the real scandal in the figures being the huge number of private sector workers who are without an occupational pension at all picked up on the central theme of the TUC’s earlier Press Release on the ONS survey. In it, Brendan Barber, General Secretary, went on to comment that the figures pinpointed the correctness of the government’s reforms to the pensions system starting in 2012 in requiring employers to contribute to schemes where employees themselves want it.

This is a different issue to the staged introduction of the employer contribution to personal accounts announced by the DWP and, while it remains disappointing that the regime will take so long to introduce, as I blogged about below, it is good to see something of a fightback against the Tories’ announcement that they would review the reforms. Tim Jones, chief executive of the Personal Accounts Delivery Authority, also came out fairly strongly recently in some unattributed remarks (or otherwise a private interview) picked up by Citywire in which he insisted that the reforms were on track.

Something needs to be done about the large number of people not saving for their retirement: the system of personal accounts is a good start in tackling that culture and there are indeed a lot of myths that need to be busted about personal accounts. If only that lengthy staged introduction could be cut-back…

Written by Calvin

29/10/2009 at 6:14 pm

DC not making up for DB

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It’s often assumed that the declining private sector provision of defined benefit schemes is compensated for – at least, in terms of coverage – by defined contribution schemes. Research published today show that even this limited scenario is not the case, with the falling percentage of the private sector workforce covered by DB schemes meeting with a percentage of the population covered by DC schemes which is, at best stagnant. More than three in five private sector workers have no pension at all.

At the same time, the percentage of the private sector in DC schemes which have an employer contribution rate in excess of 8% – i.e. which operate at the sorts of levels which might deliver a comparable pension to DB schemes – is a little over 7%. So, only around one in three members of DC schemes are earning a pension which might be assessed as adequate.

The TUC Press Release announcing the figures carried some useful statistics, which I have graphically presented here:untitled

The action that Congress will be calling for this week on quality pensions is timely; indeed, it is overdue. As the motion says, defending quality pensions isn’t about attacking the pensions of public sector workers; it is instead about trying to do something that will ensure that workers in the private sector gain access to pensions better than they currently receive – ones which will do little more for them in retirement than leave them relying on the state.

Written by Calvin

14/09/2009 at 5:13 pm