Pensions – we need good news as well as the bad and the ugly

good-news-bad-news-blog-2018No-one can claim that all is rosy in the pensions world.  There are many things that could – and should – be done to make UK pensions better, simpler and more sustainable.

No-one can claim that all is rosy in the pensions world.  There are many things that could – and should – be done to make UK pensions better, simpler and more sustainable.

Those of us in the pensions industry have a responsibility to better understand the Future Pensioner, especially how to help the many who find retirement options and planning confusing. But could the media help by reporting relevant pensions stories in a more positive light?

Bad news often makes more compelling headlines than good news but too much negative reporting – without looking at the flip side – risks undermining confidence and trust in pensions.

Let’s start by looking at some recent stories and think how they could have been portrayed differently.

Carillion

In January, Carillion collapsed with a reported £800 million 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. £800 million better off in fact.

The politicians’ response was to haul The Pensions Regulator (TPR) in front of the select committee and to renew calls for heavy fines for directors who ‘recklessly underfund their pension schemes’.

Now, based on publicly available information (including the recent Select Committee report), it’s difficult to see what steps TPR could realistically have taken to make a meaningful dent in the £800 million PPF deficit, other than, possibly, pulling the plug sooner. But then taking such decisive action would no doubt have been contrary to one of TPR’s conflicting statutory objectives.

The PPF recently reported a £6 billion surplus of assets over liabilities and have indicated that they are geared up to take on the Carillion members and liabilities. How was this reported?  ‘Another six similar-sized corporate failures would wipe out the lifeboat’s reserves’.

So a business failure (but a pensions success story) generates a swathe of negative publicity around all concerned, including the PPF.

Auto-enrolment

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.

BHS

Sir Philip Green pays £363 million to ‘fix’ the pensions issue.  No credit to TPR for their part in securing such a settlement; Frank Field continues his personal crusade against Sir Philip; and press reports focus on the possibility that his contribution might ‘only’ turn out to be £348 million 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 but I think there is a perception problem with pensions all too often being seen as bad news.

The envy of the world

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 proportion of the workforce enjoyed defined benefit (DB) pension provision. Failing defined contribution (DC) schemes were being converted to DB.  And we were about to enjoy an unprecedented bull run in equity markets. What could go wrong?

Over the last 35 years we have seen a huge amount of pensions regulation, much of it in response to events. 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 are covered by such benefits.

Over-regulation – and frequent changes to pensions taxation – also make pensions more complex and harder for ordinary people to understand.

What sort of regulation would be helpful?

Help stressed schemes and sponsors

First the government should take actions to help ease pressure on sponsors of DB pension schemes.

In my view, having a lower, but 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.

I was disappointed that the recent White Paper did not address this issue.

Return of collective provision?

In the private sector, most employers have chosen to replace their DB schemes with DC schemes as the only viable alternative.

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 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.

I am hopeful that – perhaps with Royal Mail as the flagship – we will start to see a gradual return of collective provision.

No more tax changes

I’m also hoping that Philip Hammond isn’t eying up pension savings for another tax grab.

Looking over the next five years:

  • if only politicians could stop unhelpful tinkering with pensions
  • if they made sure that changes were designed to make pensions more sustainable
  • if we started to hear good news stories about pensions

Perhaps then the general public could start to feel confident about pensions again.


bob-scott
By Bob Scott
LCP partner and ACA immediate past chairman