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Steve Bee: The elephant in the room on workplace pensions

Employers providing DC pensions pay far less into them than those providing DB schemes

Sooner or later, we will have to accept the fact the golden age of company pension provision in the UK is over. It has been for some time now, yet the pensions industry and the government are still in denial.

The problems have been there from the start. Yes, gold-plated defined benefit pensions once provided millions of people with enormously valuable assets that dwarfed the paltry state pension payments available.

The state could never be as generous to its population. No social contract would survive the long timescales needed to bring such plans to fruition for all. It can only ever provide pension entitlements seen to be affordable to working contributors and fair between generations; a rift all too easy to exploit in the twists and turns of political rivalries over time.

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But even in its heyday, that gold-plated company pension sector was only ever able to provide for the half of the population that worked for the biggest employers – including, of course, the biggest of all: the government.

Today, the provision has declined even further. Employers are more likely to offer new entrants pension benefits on the defined contribution basis rather than DB.

There is nothing wrong with that. Indeed, DC pensions can offer far more flexibility to people later in life than DB schemes. If the same level of contribution is made to a DC scheme over a working lifetime as the level of contributions required by a generous DB scheme then, by and large, the value of the accrued assets would be the same.

But the problem is that employers providing DC pensions pay far less into them than those providing DB schemes. And that applies even when it is the same employer running both types of scheme.

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This is a problem no one seems comfortable talking about these days. It is the elephant in the room.

It is true we now have millions more saving since the pension reforms of 2012. But the price we have paid for that – the demise of the state second pension – is something understood by no more than a handful of people. For this reason, it is not part of the national debate and likely never will be.

In the meantime, the river of private pensions in the UK will only get shallower as it widens out to include so many more of us.

Steve Bee is director at Jargonfree Benefits

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Yes, nothing very new, but the reasons appear to be overlooked:

    1. The largest employer segment is now the smaller firm and they cannot afford these generous benefits.
    2. Many investors have learned the lesson and generally try to avoid those firms with DB schemes. They have always been an open chequebook and it is perverse that funding these pensions is sometimes greater than dividends paid out.
    3. Britain pays the most parsimonious State pension in the whole of the OECD – as measured by the percentage of national average earnings. This is inexcusable.
    4. “The state could never be as generous to its population”. Not so. Norway a country that was pratically bankrupt in the early C20 now has the best sovereign wealth fund in the world and it is used for pension benefits. Other countries do a lot better than we do (Greece is NO example!).
    5. Successive governments have used pensions (both private and state) as a football. The financial services industry also doesn’t have clean hands. Is it therefore a wonder that many don’t trust pensions? It seems to me that instead of CRAP (Contributions relief at payment) the old system, where people actually saw their tax bill reduced as a consequence of their contribution was a rather better incentive.
    6. The whole ethos of the UK population is geared to spending what the don’t have. Indeed our economy relies on it. Compare this to Germany where the very word guilt is the same as debt. (Schuld). Perhaps we need to change our habits?

  2. The whole reason DB is no longer a thing is because of their huge cost to the employer. DC pensions took over literally so employers could pay less in, so I’m not sure why it’s such a surprise. Some firms were less generous with their DB as some firms are now less generous with their DC schemes. Nothing new or surprising about it.

  3. Steve makes some interesting points. Two of the main reasons why insufficient DC benefits are available to retirees is due to both employees’ indifference about pensions and lack of affordability to pay the necessary amount during the critically early accumulation stage. As Harry also comments, SME’s are now the UK’s largest sector the majority of which either cannot afford or are unwilling to contribute the amount needed to overcome this problem. This is possibly evidenced by the smaller contributions that employers have to make into workplace pensions from April next year with employees having to pay 5% which is 66% more than their employer. This in itself could turn employees off pensions whilst many may find they cannot afford to pay 5% and then miss out on the employer’s contribution – the worst possible outcome for employees and the State!
    Greater flexibility on the contributions could help alleviate this – if an employee can only afford 4%, a caring employer could add their 3% to it and invest it into a non workplace pension. Meanwhile, more education about pensions and the need to invest more at the soonest possible time would help – how about a free Pension Wise guidance session for those below the age of 50?

    • Also it is worth also considering the self employed. AE is even worse for them for the same reasons as I have already set out concerning cash flow, single premiums and the way the tax relief works.

      Why people (both employed and self-employed) can’t just chose to have a personal pension (or Stakeholder) instead of this sub-standard scheme is perhaps another disincentive.

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