Was Private Frazer right all along?
Last week, I attended the excellent Barnett Waddingham LLP “Employer Pensions and Benefits Conference” in London to hear a great range of speakers discussing issues affecting employers offering defined benefit (DB) and defined contribution (DC) schemes to their employees, as well as related issues like employee wellbeing and healthcare. The plenary session was kicked off by Lawrence Churchill CBE, who gave a very thought-provoking masterclass in the futility of our existence. No, it wasn’t a philosophical treatise, but the message (perhaps unintended) was nonetheless pretty bleak. As Private Frazer would have said: “We’re doooomed!”. It goes something like this.
The average DC pensions pot in the UK is around £30,000. In a low interest environment (and Mr Churchill and other speakers produced some interesting historical data to demonstrate that our current low interest, low inflation environment is actually much closer to historical long-term norms than many people believe), you need around a £200,000 pension pot to enjoy anything approaching security and reasonable living standards in retirement, even allowing for some State Pension. So, divide by around 25 for an income of £8,000 – £10,000 a year, plus State Pension.
Current average DC contributions stand at around the 9-10% mark; they would have to stand at a 20% minimum to even start to close this funding gap. There are only two places that money can come from – employers, hard pressed by other State demands and the requirements to actually operate and invest in their business, and employees, who may have not enjoyed significant pay rises for many years and who have many other competing priorities for what to do with any “spare” income – such as paying down debt, making short-term savings and helping their kids buy (or more realistically, rent) a house. So, is there any prospect of achieving the levels of increase in pension contributions that it seems would be needed?
Employers may, over the longer-term, accept a small increase in their contributions, maybe a few per cent more – but even that can’t be presumed. If they have a choice, surely they would look to provide more popular benefits – benefits that are, in social terms, perhaps just as desirable – like health and dental insurance, or support for childcare. Which employer would choose, if they had spare cash available, to provide a benefit which is not well understood or even particularly valued by their workforce? The answer must be that few would, unless the Government intervenes and legislates that pension contributions must be increased – raising the likelihood that they will be accused of imposing a stealth tax on the wealth creators and damaging industry.
As for employees, which employee these days could afford to put another ten percent of their salary away in a pension scheme?
So, are we all doomed to be involved in an industry which consistently fails to provide most employees – at least, those outside a good quality private or public sector DB scheme – with decent living standards and security in retirement? Is there any good news to look forward to?
The answer, sadly, is not much. However, studies and experience in the US show that asking employees in advance to surrender a proportion of their next pay increase in the form of additional pension contributions – so spending money that you do not yet have and therefore won’t miss – really works. Over time, some significant hikes in contribution levels have been achieved and the measure seems popular with employees. Of course, in the US, their money is not quite so “locked away” as it is here in the UK even after the 2014 budget changes, with members being able to access funds in their 401K plans pre-retirement, so the US experience may not translate quite so successfully on these shores.
The second reason for hope is the increasing realisation that some form of work and income will be necessary for most of us, late into our sixties and perhaps into our seventies. Pension, private and State, alone won’t be sufficient. So, hats off to the good people at Business in the Community (BiTC) for understanding this and starting to promote awareness of the need to remove those barriers that keep mature workers out of the workforce, whether deliberately or unconsciously. Read more about their excellent Age At Work campaign at http://www.bitc.org.uk/programmes/age-campaign
Otherwise, we have to fall back on the basic principle that if employees could better understand what was in store for them during a long retirement with insufficient income they would in all probability start saving earlier and save harder, and would better appreciate the value of their employers’ efforts to match or exceed their own personal pension contributions. As it was in the beginning and always shall be – the key is communication, communication, communication.