Employer Task Force report -
More Christmas reading on pensions was put out today as the Employer Task Force published its much-trailed report. The task force was established back in July 2003 and was asked to report back to the Secretary of State for Work and Pensions on the role of employers in the pension partnership. In particular it was to look at how employers can help to increase pension provision in a voluntary framework. Well it’s done that and a bit more besides if my reading of the report is correct.
The report not only says what employers can do about supporting the current voluntarist system, it also puts its oar in with recommendations as to what Trades Unions, employees, Government and the financial services industry should be doing too. We’ve all got a role to play in sorting things out. In the stark language used to describe the problem the task force says; “make no mistake, we are in the ‘last chance saloon’ for voluntarism and unless we can reverse the current decline in adequate employer-led pension provision and deliver increased savings from both employers and employees through the voluntary framework, the Government may be forced to look at more drastic solutions.” Strong stuff, but I’ve got loads of issues with it I think.
Before saying what the task force recommends each of the parties involved should do I’ll quickly remind you about where we are today in terms of voluntary pension savings in the UK. To start with we have £1,300 billion pounds in private sector funded pension schemes. Most of that is in occupational pension schemes run by employers, but a fair bit of it is in individual personal pensions and additional voluntary contributions (AVCs). In European terms £1,300 billion is massive. If you add together all of the funded pension savings in the other twenty four European Union countries you’ll find we have saved more in the UK than they have saved between them. The important point about this is that we have never had a law in the UK that required employers to set-up and contribute to pension schemes, nor have employees ever been forced to save in personal pensions. Our pension savings have been put together in a voluntary system and that voluntary system has been spectacularly successful up to now.
The problem we have with our voluntarist approach is that it has led to the best funded pension position in Europe, but those funded pensions are only owned by around half the workforce; the other half looks doomed to retirement on State means-tested handouts. In a nutshell that’s what the recent report by the Pensions Commission pointed out. The question really is ‘how can we spread employer-sponsored pension saving to the half of the workforce that is losing out?’ That’s a hard one to answer as any discussion on it gets bogged down early on with the whole suitability thing where the existence of the means-tested benefits for pensioners make pension savings unsuitable for millions of people. A sort of ‘pensions Catch 22’.
Worse still, the good pension schemes set up by employers in the past are themselves changing and becoming less generous. The well-documented switch from final-salary to money-purchase comes with an unhelpful reduction in the level of pension contributions employers seem prepared to make. So, not only do employees lose out as employers switch the risks associated with longevity and annuity costs to employees (which is what the Defined Benefit to Defined Contribution switch is all about really), but employers also tend to get deeper pockets and shorter arms at the same time.
Also, and to state the obvious, I must mention that although half the workforce in the UK is covered by employer-sponsored pension arrangements, it’s not half of the employers in the UK that provide pensions for their employees. It tends to be the bigger ones, but as there are far more small employers than large ones it’s unfortunately true to say that most UK employers don’t run company pension schemes. They never have done, in fact.
Anyway, with that background out of the way, what does this task force think we all need to do about the problem?
For employers they’ve come up with, amongst others, three suggestions:
- To recognise they have a responsibility to help fund pensions for their employees.
- To aim to achieve over time combined contribution levels of 10-15%, with employers ideally providing two-thirds of that.
- To recognise the importance of maintaining fairness in the shift from Defined Benefit to Defined Contribution schemes.
Well I don’t disagree with any of that, but the first point is a toughie as it calls for employers who’ve never been involved in company pensions to change the habits of a lifetime. The second point too is a hard one for small to medium-sized companies I should think. An employer contribution of 10% of payroll would presumably come with a 10% reduction in employees’ pay ‘over time’ and might not go down too well with people once they spot what’s going on. The third point, though, is something that should be possible. There is no reason why a switching of the risks involved in saving for a pension should also come with a kick in the teeth for employees contribution-wise.
As far as the Government is concerned the task force makes three key recommendations too:
- To provide a stable, long-term framework for UK pensions with clear guidance on who should be saving, and achieve a broad policy consensus on the way ahead.
- To maintain stability for medium and large employers by maintaining current levels of support for pensions.
- To tackle the challenge of pension provision among smaller businesses by introducing a new targeted financial incentive to encourage employer contributions.
Well, the first two are effectively saying that Government should do exactly the opposite of what it actually does, and always has done, as far as pension policy is concerned. I can’t be the only one who thinks Governments are completely incapable of leaving pensions alone for even five minutes am I? I mean, stability and pensions just don’t go together in this life as far as I can tell. The third point is difficult too. It’s all very well giving extra financial incentives to get people saving, but if all they’re doing is buying privatised welfare what’s the point? The bigger issue, surely, is to sort out the structural problems that are acting against more widespread pension ownership. That sorted, throwing money at the problem to get saving going would be one way of doing it.
The task force also has a couple of suggestions for employees to take notice of:
- To take responsibility for their own pension provision and contribute to their pension schemes.
- To recognise employer support for pensions as a key benefit.
Hmmm! Well I suppose the first point’s harmless enough, but if the second one comes with a drop in pay of 10% I’m still not sure everyone would see it as a ‘key benefit’. Particularly if the means-tested system of retirement benefits stays in place and millions of peoples’ savings become effectively just another form of taxation.
Trades Unions are charged with two points by the task force too:
- To promote awareness of the need to save for retirement among their members.
- To encourage members to join good occupational pension schemes and to make contributions.
I don’t disagree with any of that, but the word ‘good’ is kind of key really.
Lastly, and not to leave anybody out, the task force asks the financial services industry to look carefully at two points too:
- To work with Government to review the annuities market.
- To provide better service, especially to small businesses.
Hmmm! And double-Hmmm! I can’t think of anything to say on the second point, but the annuity review they’re talking about would be helpful I suppose. But it’s not an easy issue by any means. Part of what the task force wants to see happening is some thought being given to restoring annuities to the 10 to 15 year products they claim they once were, when we all died earlier, by producing alternative products for the early years of retirement, such as income drawdown for instance. This is interesting as it looks at the so-called longevity problem from the other side to those calling for later retirement to become the norm, but it presupposes people will be stashing away sufficient savings to draw from in the first place. At the moment that would appear to be against the run of play. In fact, that’s why this report was commissioned in the first place really…
Anyway, the report is quite a good read as it’s full of interesting facts and stuff that the task force dug up in its quest. Anyone wishing to read the whole thing during their Christmas break can download a copy by following the link below if they like. Be careful though, the report and the associated Good Practice Guide are over 100 pages long, so say goodbye to your printer cartridge if you’re downloading it on your inkjet printer at home.
14 December 2004
This information is based on our current understanding of the Employer Task Force on Pensions Report to the Secretary of State for Work and Pensions published on 13 December 2004.
Any research and analysis included has been provided by us for our own purposes and the results of it are being made available only incidentally.