A financially secure retirement Protecting our future

2 A financially secure retirement

A financially secure retirement By now, everyone knows that these are challenging times for providing for our collective and individual financial security in retirement. The traditional UK pattern consists of a modest state pension, supplemented by a more generous employer pension. Until recently this has successfully been providing a financially secure retirement for those who have been enrolled in it. But the system has been badly hit by the rapid decline in the employer-provided coverage. This in turn has exposed the shortcomings of the state pension scheme and the sticking plasters of means-tested welfare benefits devised to target particular gaps as and when they impacted the public consciousness. State restrictions It’s clear that, unless the state is prepared to step up and take responsibility for providing a much larger share of the retirement income of the nation’s elderly, we will need employers to return to something like their former position of prominence in this area. Even before the current global economic woes, those developed nations with ageing populations and generous unfunded state pension promises were starting to backpedal on their promises. In that environment, the UK was never likely to buck the trend. In this age of austerity it is unthinkable.

Employer constraints We can’t treat employers as cash cows either. They have businesses to run and shareholders to reward. They will understandably only provide benefits to the extent that it is beneficial to the business. In previous decades, the economic case for providing good pensions for employees was easier to make. Indeed, in some cases it even allowed for a degree of largesse where an employer felt disposed towards rewarding loyalty by long-term employees who had shown a commitment to the success of the business. That was then. Now things are tighter and businesses need a stronger case to take on responsibilities for remunerating former employees in their retirement. This has driven a mass exit from schemes where the liability is anything other than a commitment to make (more modest) contributions into what is effectively a complicated savings fund. If employers are to be tempted into assuming a greater responsibility, they need to be reassured that in doing so they won’t be exposed to costs and liabilities that are unpredictable and largely outside of their control. Naturally no business can knowingly and voluntarily live with such a risk, and its directors would be failing in their legal duty to their shareholders if they did so.

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3 A financially secure retirement

Government policy The coalition government has been attempting to address this dilemma since the last general election in 2010. The stated high-level policy objective is to “ reinvigorate workplace pensions ” and one can see that a number of more detailed policies are being pursued in order to achieve that, such as: • The roll-out of automatic enrolment • The proposed new simpler single-tier state pension scheme • A widespread dialogue with the pensions industry and key busine sses on new scheme designs. The government has also been working closely with the industry to eradicate some aspects of the existing offerings and processes that are unclear or inappropriate for participants. One initiative is the industry steering group that developed the code of good practice for incentivised transfers. By involving the industry (which has now taken charge of the finished code), the government has achieved consensus and buy-in from all concerned. The resulting system is stronger than a regulatory system imposed by statute would have been. Similar initiatives, such as reviews of charges, are also being pursued.

Consensus — the holy grail This search for consensus is to be welcomed, and should result in a stronger system. So why is the approach not adopted in the political sphere as well? The Department for Work and Pensions (DWP) is charged with the pensions reinvigoration brief. With only a few unfortunate diversions, it has been following an overall path to achieve that. This has been reasonably successful in the limited areas covered, and to that extent has reflected well on the concept of the coalition government and the stability conferred by having had a knowledgeable and capable pensions minister in place since 2010. Unfortunately the same cannot be said of their colleagues in the Treasury. They have not reformed their traditional stance that, when it comes to all aspects of state finances, they alone know best and can act in isolation to make fundamental changes to taxes without any consequences beyond their balance sheets. Pension provision has suffered the effect of this on many past occasions and sadly the mind-set persists, with the “near miss ” on reductions in pension tax relief in the 2012 Budget and the direct hit in the following Autumn Statement. The arbitrary reductions announced to the lifetime and annual allowances, solely to fill an unexpected gap in the nation’s finances, flies directly in the face of the considerable reductions carefully negotiated with the industry over the summer of 2010. Perhaps more importantly, it cuts across the joint efforts of the industry and the DWP to rebuild an environment in which employers can feel safe to re-enter the water.

Maintaining policy stability There is a bigger concern. The next general election must be held no later than May 2015, which means that the coalition government has only the second half of their expected term in which to embed the policy initiatives already started. And thereafter? It seems highly likely that the next government will be of a different hue to the present one, and although there appears to be some political consensus currently around some high level policies, it is absent in others. Indeed, the lack of consensus in approach between departments in the same government illustrates how transient the views of politicians can be. The future beyond that is even more uncertain. Pensions provision is a long-term undertaking, and necessarily works to time scales that are well beyond the lifetime of individual parliaments. If we are to have a pensions system that successfully engages employers, we must have long-term stability and predictability. Sadly, that is at odds with our adversarial parliamentary system.

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Solutions What is the solution? If it continues to be impossible to forge long-term pensions policy consensus in the political arena, one solution would be to take much of the decision-taking process out of the hands of the politicians of the day, and hand it to a non-political group that can transcend the five-year parliamentary cycle, while still obliged ultimately to report in to the parliament of the day. If the group were to be successful in forging a sensible system and maintaining stability, it should be more difficult for inexperienced politicians to intervene. This would be a radical step. Not surprisingly, it has gained no traction with the politicians. However, there are positive benefits to be gained for the nation as a whole, and the bigger picture needs to be addressed. Meanwhile, other things may be possible. One suggestion that is getting serious attention is some form of “firebreak”. If the legal basis under which an employer signs up to providing a pension scheme that is more generous than the legal minimum is changed to the detriment of the employer, it would be able unilaterally to stop the scheme in respect of members’ future service, with no exposure to any legal recourse by employees. However, such a proposal would be difficult to design and apply, and so may well not get past the “What if? ” stage. At the foot of the practicality ladder is the familiar process of continuing to lobby politicians about policy directions, as and when new ideas are proposed. In a democracy, that works to some extent, but its possibilities are limited in practice. As Buck is well aware, it requires a constant effort to try to impose a practical and consistent agenda on politicians of different persuasions. One thing is clear: We are at a watershed with workplace pension provision. If we are to protect our future, we must find a practical solution to the curse of short-termism.

About the author: Kevin LeGrand is a Principal, Head of Pensions Policy, and a director of Buck Consultants’ professional trustee company. He is a Fellow of The Pensions Management Institute, with over 32 years of experience working on technical issues in the world of pensions. For more information, please contact +44 (0)20 7429 1000 or hrconsultinguk@xerox.com

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