Posts Tagged ‘Defined Contribution’

David Davison

A little tale of everyday folk and how sharing and best intentions may not always achieve the results you expect……………..

Peter, Graham, Phil and Rachel have just started their arts course at University in London and are sharing a house. Being arts students they have a lot of spare time on their hands. One evening, after a hard day staring out of the window, they’re in the pub (unusual for students I know!!) and Graham mentions he really needs a car for a part-time job he has on the other side of the city, and can’t get there easily using public transport because of the timing but he can’t afford it with all his other bills. Read more »

David Davison

Professional Pensions reported my concerns about the promotion of defined benefit schemes to 3rd sector employers and my view that any such promotion which failed to ensure that the employer fully understood the attendant risks and uncertainties, was irresponsible and totally inappropriate. This elicited some interesting responses and I wanted to thank everyone for their comments on this important issue. There did seem to be a bit of confusion however, which I wanted to clear up.

My comments are clearly focused on DB provision in the third sector. Stephen Nichols, the Chief Executive of the Pensions Trust, was given a 2 page platform and a video to share his views on “Saving DB” and I thought it completely fair and balanced of PP to carry an alternative view and I thank them for that. Other senior staff within TPT have espoused similar views recently around DB so it wasn’t unreasonable to assume it was something of a ‘house view.’ The Trust is a highly regarded and respected organisation marketing primarily defined benefit pension scheme services to third sector employers and I was concerned that some of these employers may accept such a suggestion as being right for them and I wanted to ensure that they were totally aware of the risks involved.

In my experience of advising 3rd sector organisations they are ill-equipped to deal with defined benefit pension arrangements and certainly with ‘multi-employer’ DB arrangements where there is a supplementary risk that the strong will be required to pay for the weak as well as for themselves. The funding position of TPT schemes is not unique, you only have to consider schemes like PNPF and MNOPF to name but two, but their target market is. One respondent accused me of having a binary view and perhaps I do – DB Schemes should be left to organisations who can afford the contributions now and in the future and can deal with the volatility of liabilities and costs. Is anyone seriously contesting that view? Read more »

Alan Collins

Open market option for all?

I read with interest the guidance to individuals with money purchase benefits published on 2 November by the Pensions Regulator (tPR) and echo comments from Pensions Minister Steve Webb that “choices we make at retirement are amongst the most important of our lives” and “shopping around can provide better value for money and significantly boost retirement income”, and those from tPR’s acting Chief Executive Bill Galvin who has stated that “members could miss out on a higher retirement income because they are not well-supported in making good choices”.

The engagement of the Pensions Regulator in the education process within occupational defined contribution schemes is welcome, and emphasis has rightly been given to the potential benefits to members of obtaining independent financial advice. In particular, the guidance should act as a reminder to Trustees of schemes which provide both defined benefits and money purchase benefits that the members with money purchase benefits deserve due care and attention.

However, the guidance appears to be in stark contrast to the regulatory approach and pending legislation governing defined benefit arrangements, particularly those containing contracted-out rights. The “presumption of guilt” surrounding transferring benefits out of a defined benefit arrangement, and the potential end to the ability to transfer contracted out rights from defined benefit to money purchase arrangements in 2012, would seem to be at odds with the ethos of encouraging members to make choices which best suit their own circumstances.

For example, the value contained in some defined benefits (such as a prescribed level of pension increases or spouse’s pensions where the member is single or where the spouse already has a substantial pension), could be used to provide alternative benefits which are more suited to the needs of the individual concerned. Also the value of a money purchase pension pot can be retained on the death of the member, whereas this event may cause the value of a defined benefit to be significantly eroded .

I would therefore ask that members of defined benefit arrangements continue to be afforded the same opportunities to exercise their “Open Market Option” in the future.

Neil Copeland

The first time I saw Def Leppard the drummer still had both his arms.

Not many bands visited remote outposts like Belfast back in the early 80’s and we were mightily supportive and indeed grateful to those who did, like Def Leppard. The band had already released a couple of albums but this was the start of the tour to support Pyromania, the album that was to push them into stadia around the world and was a precursor to their absolutely mega-album Hysteria. They put on a great show that night and, indeed, as an ageing rocker, I can attest that they still do.

But, as with many bands, global success will alienate that small sub-group who only ever like a band if no one else has ever heard of them. You know what I mean – the guy or girl who goes “Yeah I saw them in a pub in 1980 when they couldn’t play their instruments and it was only me and my dog in the audience, and they were sohhh cool, but now, like, they’ve just totally sold out and are rubbish. I’m really into Ethel the Frog now”. Luckily for fickle fans everywhere Ethel the Frog were never a success. Not so lucky for Ethel the Frog.

The Governments proposals on the abolition of compulsory annuity purchase seems to be subject to some equally fickle fans, if a recent article in the FT is to be believed.
Read more »

Neil Copeland

Paving the road to hell

Baldrick has clearly taken up employment with the NAPF. They have come up with a plan (see FT.com – Pension schemes to face ‘quality mark’ test) which is as cunning as a fox who’s just been appointed Professor of Cunning at Oxford University but has moved on and is now working for the U.N. at the High Commission of International Cunning Planning. As good old Balders himself might have said.

And the cunning plan is? A quality mark plus for pensions!!

So the message to is:-

  • Employer paying 10% – Good!
  • Employer paying 6% – Okay!
  • Employer paying less than 6% – not worth bothering with!

It’s a good job they’re bringing in auto enrolment for personal accounts!!

And the really cunning bit is that they are suggesting that schemes can self-certify their compliance. I think mortgage brokers had an equally cunning plan once.

The industry has to recognise that it has a problem with trust. As reported in the press, pension schemes have suffered problem after problem, whether DB or DC. Maxwell, Equitable Life, closing final salary schemes, plummeting DC asset values.  The article notes that 3.7m employees are in DC Schemes against 2.7m in DB Schemes. But this pales into insignificance against the number who are making no pension provision at all (See Daily Express – UK Facing Pension Crisis).

Sticking a tick box derived quality mark on a relatively small number of self congratulatory schemes is not the way to rebuild trust. We need to design solutions that encourage people to make some level of pension provision and that also encourage employers to help them. We also need to ensure the state system does not disincentivise modest provision. Any provision should be better than none.

We also need genuine simplification – can someone ensure that, next time round, HMRC has access to a proper dictionary?

In the current climate many employers are struggling. My concern is that the NAPF quality mark, however well intentioned, will result in both members and employers concluding that, if they can’t meet the 4% and 6% contribution levels required, then they might as well not bother. It does rather reinforce the view that the NAPF is dominated by larger employers and consultancies and is out of touch with the smaller and medium sized enterprises struggling to keep their heads above water.

The Government’s proposals for personal accounts are flawed but are at least a start and remove many of the barriers to entry that currently exist.

Finally, if the NAPF is going to have policy developed by a fictional comic character it’s a pity it opted for Baldrick rather than Homer Simpson. Homer’s policy might not have extended much beyond free access to donuts, beer and chilli, but at least the resultant damage would be easily contained.

David Davison

A study conducted by Stanford University in California has suggested that by 2050 the population could have to work to the grand age of 85! Based upon their calculations currently we have 1.5 pensioners for every five employees, but by 2050 that figure will rise to four pensioners for every five workers. Read more »

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