If I was a public sector worker, I would be brea-thing a mighty sigh of relief. Lord Hutton seems to be on their side if his interim report is anything to go by.
He defends public sector pensions to the hilt, especially for those on lower incomes. He says: “Public service pensions should provide an adequate level of retirement income – with a reasonable degree of certainty” and that any changes made to the schemes should “proceed carefully and ensure adequate protection and proper safeguards to accrued rights”.
Hutton explains that the fall from grace of private sector pensions does not justify the argument that pensions in the public sector must follow the same course. “I regard this as a counsel of despair,” he says.
He also guards against the type of scheme that employees take on themselves, saying: “If lower-paid employees were fully exposed to investment risk, this would increase uncertainty of income in retirement, which is difficult in particular for the low paid to manage.”
For this reason, he does not think it “feasible” for public sector workers to move to a def-ined-contribution scheme – the option which is rapidly beco-ming the scheme of default for private sector workers following the closure of final-salary plans.
Public sector workers should be breathing a sigh of relief because employees take on all the risk with DC arrangements – the vagaries of the stockmarket, the amount they and their emp-loyer contribute and the prevailing annuity rate when they retire. A move to a DC scheme would lead to a more inferior pension than even a watereddown defined-benefit scheme.
My concerns on DC schemes have been neatly summed up by Nigel Aston at PensionDCsions. He reckons that workers are being thrown “a hospital pass” from companies closing finalsalary schemes. He says: “Employers may feel that they have divested themselves of onerous DB uncertainties but there has not necessarily been a corresponding acceptance of these unknowns by the membership. The sponsor has unwittingly executed a hospital pass. The unfortunate member may be about to be heavily tackled by the weighty forwards of volatility – volatile capital markets, volatile interest rates and volatile longevity expectations.”
Many in the industry suggest that education is the key and that employees will have to take responsibility if they are to realise their retirement dreams, but that is a hard slog and will take time. That is why employers and trustees have to step up to the plate, yet I worry that most are doing anything but.
There is a great deal of noise about diversification and introducing funds that should smooth the path to retirement. But in reality, few DC schemes are adopting these strategies.
Look at the take-up numbers and it would appear corporate schemes are simply paying lip service to the need for diversi-fied strategies.
Instead, pension funds are filled with equities, let alone having any exposure to basic assets such as bonds and cash. It is a fact that most members still invest in defaults and most defaults are still 100 per cent invested in equities in the accumulation phase.
PensionDCsions research into default strategies of large schemes shows that 82 per cent of members are in default schemes. Its figures for 62 of the UK’s biggest schemes, accounting for 630,000 members and £10bn of assets, show again that most members are in funds that are 100 per cent in equities at the accumulation stage.
How much worse off people will be under DC arrangements will not become clear until the baby boomers start to collect their gold watches. Given contri-bution rates (which may fall lower when Nest is launched) and given the investment performance of many DC funds, the prognosis, I suspect, is not good.
Paul Farrow is personal finance editor at the Telegraph Media Group