The Emperor has no clothes. DC Pensions

From Professional Pensions "John Gray looks at whether current contribution levels across DB and DC are adequate.

As well as being an employee representative on a pension board I am also a UNISON trade union branch secretary with members in more than 140 different private and public service employers.

While I am pleased that auto-enrolment (AE) has taken off so far, I am astonished about how little money employers are paying into pension pots. While many do pay more than the statutory requirement, we see well known national organisations with supposedly good reputations paying peanuts into their employee pension schemes.

If you put in only the AE 8% then you will be retiring and die in relative poverty.

I remember my first ever TUC pension course and our tutor (by coincidence the father of present day PLSA CEO, Joanne Segars) telling us there was an unscientific rule of thumb that you need to put around 20% of your income into a pension for 40 years to retire on half pay and receive a lump sum. Since workers cannot afford to pay 20% into their pension the employer has to pay the greater share.

Whenever I repeat this story to trade union members and to employers they are genuinely horrified at both the amount and the length of time needed.

I know this 20% rule of thumb is full of holes but recently I went to the website of a well-known stakeholder provider and spent a little time on its pension calculator site. While there is no such thing as a perfect projection I was pretty shocked at what I found.

How much?
I used the example of a worker aged 28, who has no existing pension provision on £30,000 per year, who is planning to retire in 40 years' time at age 68. I worked out that not 20% but a ridiculous 50% (£1,250 per month) of their income would have to be invested in order to hopefully retire on half pay (with no lump sum).

If you include the projected state pension you will still have to pay in an eye-watering 34% of your income (£850 per month). So only paying 20% into your pension for 40 years will actually get you nowhere near half pay. If you put in only the AE 8% then you will be retiring and dying in relative poverty.

Okay, maybe under AE a 28-year-old will by that age have some existing pension provision. Current investment assumptions may prove to be wrong and be too pessimistic. Perhaps the industry will really drive down costs and charges (including hidden fees) and increase return. Annuity rates could improve?

Maybe, maybe not. Young people have student loans to pay off, sky high rents to cover while also trying to save for a mortgage. While retention rates for AE have been much higher than expected, this might change. Especially if people think it is not going to be worth it. Current investment assumptions could prove to be optimistic. The industry is very good at side-tracking attempts to cut its charges and annuity rates could remain the same for decades.

So let's keep the 34% of income figure. It's a good enough guess as any I think. Now, should the union be arguing with employers to be paying, say, 26% employer pension contributions and employees 6%? I can imagine the response. Let's face up to it – defined contribution schemes are just not going to deliver.

But why is it some of my union members still belong to a good-quality, national, career average defined benefit schemes, whose total cost for future actuarial is capped at 18.5%? With the employer contribution a maximum of 13%? Surely it's time to think again about modern defined benefit schemes?

John Gray is a London Borough of Tower Hamlets Pension board member though he is writing in a personal capacity

Lab12: Workplace pension fringe

This fringe by NAPF/Smith Institute was on Monday. Gregg McClymont MP, pension shadow minister is speaking. Monday (1 October) was of course the day that Workplace Pensions began. So it was pension wise, a special and even historic day.

The Labour position outlined by Gregg is encouraging. He wants full transparency on charges. He wants to encourage scale. There are nearly 50k pension schemes in the UK. Pensions should not be a "cottage industry".  Policy now is for member Trustees for all pension funds (including those run by insurance companies) and changes in fiduciary duties.

NAPF CEO Joanne Segars spoke next about how it is interesting that pensions are being reported for the first time in a largely positive way. By Christmas 500k extra people will be saving for their pensions. Their research is that 2/3rd of people will not opt out. She agreed with Gregg about scale and also the need to have a better alignment of interests between savers and pension providers.

 

My question was that one of the reasons why there has been a low take up of pensions so far is that people are not stupid, they realise that the products currently offered are often pretty rubbish and that they do not want to take all the defined contribution (DC) investment risk.  I wondered if the new look Local Government Pension Scheme 2014 could not be a model for a rebirth of sustainable and affordable defined benefit schemes in the private sector?

 

Gregg thought the idea was interesting while Joanne reminded everyone that many defined benefit schemes were in serious difficulties.

 

This was the first of four pension fringes I attended this conference. One was under Chatham House rules so I can't post on it which is a great shame but I will do the others (eventually).

National Association of Pension Funds Local Authority Conference 2012

This was very informative and well organised conference taking place during an absolutely crucial time for the future of the local government pensions scheme (LGPS). I was there as a Councillor and member of the Borough LGPS Investment and Accounts committee.

I did “twitter” (in my case a very apt term?) during the conference (see hash tag @grayee and #napf).
The NAPF had amongst many other speakers the minster responsible for the LGPS, Bob Neill MP, the Deputy Governor of the Bank of England, Charlie Bean; the Chair of the Local Government Association, Sir Merrick Cockell (who in a Q&A I referred to as “Michael”) and from the unions, GMB national secretary Brian Strutton.

The Chair of the NAPF is Joanne Segers. By coincidence the first ever trade union pension course I ever went on was delivered by her father, TUC tutor Terry Segers. Proper old school ex-fire brigade union.

Considering the number of forthright and opinionated individuals present at the conference, the Q&A sessions were quite quiet, which gave a opportunity to a certain gobby part time politician and union rep to somewhat hog the floor during questions.

Key issues to me from the speeches and seminars were:- how Housing associations are “gagging to build new homes” which if happened could help us get out of recession like it did in 1930’s; the real problem in pensions is not in the public sector but that private sector pensions were destroyed by various incompetents; if you truly want diversity on company boards why not have employee reps on them? Are fund advisers really interested in good governance and making company boards accountable? It’s a “no brainer that LGPS should share services" (if so why not just merge?); in the current LGPS if you earn £150k per year you pay less in percentage terms net than if you earn £15k pa (this is wrong, wrong, wrong); What is the collective term for Actuaries? Answer “An invoice”; the new proposed £2 billion infrastructure fund and LGPS governance (a possible national Local Government Pensions Board?)

There was clearly an expectation by speakers that the future of the LGPS negotiations would have been finalised by now. But there is some last minute hic-cups. This is immensely frustrating but I suppose they do want to make sure, as far as possible, that there is no misunderstanding or ambiguities about the “agreement”. The ultra left trade union cry babies (the so called 0.8%ers) are of course still weeping tears at the prospect of no more strike chasing to bring about the revolution but we should have the final offer very soon.

It was good to see at the final session that the conference applauded DCLG pensions lead, Terry Crossley, who is retiring from the civil service. I have crossed swords (politely) with Terry for the past 10 years or so over beneficiary representation on the LGPS. I wish him well in his retirement and told him that if a deal is reached on a new look LGPS then he should have a new part time job and go out and sell the model to the private sector who are in desperate need of affordable and sustainable defined benefit pension schemes.