Why most Company Personal Pensions schemes are so rubbish

If you want to know why Defined Contributions (DC) Pension Schemes are usually so rubbish compared to Defined Benefit (DB) then this Office for National Statistics (ONS) chart will give you a clue.

Not only are all non trust based UK DC schemes lacking in governance they all have uncertain outcomes,  are often expensive and most will simply not deliver for their  members.

Many of whom will have to work until they drop or retire into and then die in poverty.

While Defined Benefits schemes are nearly always better for employees than any alternatives, the main reason they are so is employer contribution levels. Average DB employer contribution is 14.2% (not at all an unrealistic level in my view) while in a DC it is an inadequate 6.6%.

I would guess that under auto-enrolment (a good thing but employer contribution only has to be 3%) will bring the average DC contribution level even further down. The current rock bottom annuity rates are making things even worse.

An old rule of thumb in pensions is that you need to be putting in at least 15-20% of your wages (employee and employer contributions combined) for 40 years to aim for a pension of 50% and a lump sum.

AMNT Summer Newsletter 2013: The Minister, the Researcher, the Polemicist & Red Barry

 Dear Member’s and Friends

The AMNT year so Far

This is our latest email newsletter. 2013 has been an exciting year so far for the AMNT. Our membership has continued to grow. We have made significant contributions to government and regulatory policy on pensions and trusteeship. We have held successful and well attended open meetings and make our presence known by speaking in conferences and writing articles for the pension press.

We have been successful in our fund raising and have now employed an administrator, Kate Bendy, on a part time basis to support the AMNT objectives and our volunteer executive committee.

Pension Minister Steve Webb speaks at AMNT Summer Conference

Picture of our Joint Chair, Janice Turner, with Pension Minister Steve Webb MP, who was the keynote speaker and took part in a Q&A at our Summer Conference, “Where Now The Pension Promise?” on June 26th hosted by Towers Watson.

As well as the minister there was presentation on different pension schemes by members of the AMNT (USS, LGPS & HSBC).

Ewan McGaughey, a researcher from the London School of Economics, described the AMNT as “unique” and “the most important development in Pension Governance in 50 years”! While the ever so quiet and retiring Michael Johnson, research fellow at the Centre for Policy Studies (CPS), gave a well received “Trustees: take no prisoners” speech on “Charging in Pensions”.

All the speeches are now on the AMNT website here

There was also a showing of the new AMNT DC and Auto-enrolment video kindly developed with Barings Asset Manager.

The Anonymous Trustee Question?

Each newsletter we are planning to allow a MNT to post a question on a current issue – if you have an answer for this question then do so on the AMNT LinkedIn site or email mail@amnt.org

“The Final Salary scheme of which I am a Member Trustee has gathered up people from various prior schemes and has endeavoured to match the pension terms that each member had before. So, we have several different ages from which the member may retire without actuarial reduction, many well before their 65th birthday. Trustee consent is required for these early retirements.

This is inevitably quite a large cost to the scheme. We have recently had an actuarial valuation and the sponsoring employer wants the trustees to agree never to consent to these requests for early retirement on these terms, so that this cost may be omitted from the valuation. The trustees have never refused a request for early retirement in the past and indeed have formerly been directed by the sponsoring employer not to do so”.

Has this happened to other pension schemes? What did you do?

Encourage your fellow Member Nominated Trustees (or representatives) to Join the AMNT

Even in this social media world of Facebook, twitter and blogs, by far the best way to recruit someone is still by word of mouth, one to one. So if your fellow MNTs in your scheme are not yet members of the AMNT, please point out the benefits and ask them to join! Check out our revamped website here

Driving down investment charges

An AMNT member wants to do something about investment charges and to see whether we can't drive down charges - or at least reach acceptable standards - for our investments. The concept is that perhaps we may be able to guide members as to what a reasonable charge rate might be for certain asset class investments and not only that but perhaps have more confidence in using more challenging forms of contract - risk reward and so forth.

This is a big subject and it would be very helpful if we could identify a set of AMNT members willing to share some knowledge regarding their experiences on costs and contracts. If you are interested and can help please email mail@amnt.org

£179m of Equitable Life payments owed

The Equitable Life Payment Scheme is asking company pension fund trustees and administrators for their help to make payments of £179 million to their members. Members of the pension scheme that you act for may lose out if you do not take action. 547,000 scheme members are due a payment of 22.4% of their relative financial loss suffered as a result of UK Government maladministration in the regulation of Equitable Life.

As Equitable Life did not hold the addresses for nearly 500,000 company pension scheme members, the Scheme is asking trustees, administrators or authorised representatives of pension schemes that invested in Equitable Life between 1992 and 2000 to share their members’ addresses.

The Payment Scheme has made good progress with most company pension schemes and has received data sharing agreements covering over 400,000 of their members who are due payments of £115 million. This represents 73% of the 547,000 members who are due a payment.

The Payment Scheme is now urging the remaining company pension schemes to return data sharing agreements as soon as possible. Once this is completed, they can provide members’ addresses so the Payment Scheme can write directly to their members to start the payment process.

A list of the company pension schemes that the Payment Scheme has been unable to trace is on the Scheme’s website. Individual members of these schemes can call the Payment Scheme’s policy checker service on 0300 0200 150 to check whether their policies are eligible and find out the next steps to take.

Pension Trustees Circle Seminar

This will take place on Sunday-Monday 29-30 September at The Majestic Hotel, Harrogate. There are currently 2 Pension Trustees Circle (PTC) events in the South East – this will be the first meeting in Northern England. The PTC is for chairs of pension schemes or experienced trustees in pension funds with a minimum of £100m and it is free to attend. In addition, to celebrate the inaugural PTC North meeting and encourage attendance, the organisers are providing free accommodation for approved trustees. if you would like to apply for a place please contact Liz Doughty – liz@spsconferences.com

PMI Qualification in Trusteeship

The AMNT have been researching the possibility of organising training and the exam for the PMI certificate in trusteeship.

We would like to hear from any of our members that would be interested in the training and sitting the exam. If we have enough interest then we will explore setting up the training and the exam. To register your interest please email mail@amnt.org

Dates for the diary – Thursday 26^th September 2013!

Next AMNT open meeting scheduled to be held at Pensions Corporation, London on Thursday September 26th. Further details to follow. We are also planning an event to take place in the House of Commons in November.

Defined Benefit Defence Pack

The latest version of the pack is being updated and we hope to be able to announce a re-launch date soon. In the meanwhile if any AMNT members need advice or support on proposed closures please email DB Working Group Chair, John Gray, (in confidence) at mail@amnt.org

Finally....

Picture (bottom right) of our other Vice Chair of the AMNT, “Red” Barry Parr, on front cover of July 2013 “Pensions Insight” magazine (Shome mishtake, shurely? Ed)

Editor: AMNT Executive member John Gray

"Ambitious Enough? The future of workplace pensions"

On Tuesday morning there was a TUC seminar on workplace pensions Chaired by Assistant General Secretary, Kay Carberry. Keynote speaker was Minister for Pensions, Steve Webb MP.

In his speech he promoted his vision of "Defined Ambition" pensions.  He thinks that Defined Benefit (DB) schemes are finished outside the public sector but wants something better than Defined Contribution (DC). Problem with DB is cost to employer and volatility, while problem with DC is uncertainty and protection against inflation.  He wants something that is not as good as before (DB) but better than the minimum (DC).

He suggested that employers may pay an insurance company (as a company perk) to protect the value of a DC scheme so that on retirement you would get at least your contributions back. He also said that what employers want with pensions is a level playing field and they don't want to pay more than competitors.

My question to him was that are we just trying to reinvent the wheel? If workers need certainty and inflation protection then the answer can only be DB. A reformed DB, where you look for example at employer caps in contribution (I forgot to mention smoothing). In Japan nearly 100% of pension provision is still DB, while in South Korea which has amongst the worlds longest life expectancy they are still opening new DB schemes. If companies want a level playing field then introduce compulsion.

He replied that he did not know why DB was still so prevalent in Japan. He thought it may be related to inflation? He also said it would be inconceivable to get political consensus in the UK  to agree to DB pension compulsion in the UK.

Which I would agree with. It will be impossible to get consensus from right wing Tories. That is why the next Labour Government with a decent Parliamentary majority should just do it, because it is the right (or rather left)  thing to do.

You can check out my twitter comments on the rest of the seminar here 5 February 2013.  There were some really fascinating contributions from other panel members: Doug Taylor from "Which?"; Professor Orla Gough from Westminster Business School and Craig Berry from the TUC.

I had another chance at a question towards the end of the seminar, where I asked the panel that there is a lot of interest currently in "Predistribution" and the concept of a living wage, since the taxpayer should not be spending money subsiding bad employers who pay poverty wages. So should we in the pensions world be also talking about a "living pension" and not allowing bad employers who don't provide one to subsidised by taxpayers as well?

Not sure if I got a full response from Panel. Craig Betty was supportive but  DWP civil servant, Mike le Brun, who took Steve Webb's place on the panel said that individuals will have to take more responsibility for their own pensions. In DB they were passive but in DC they must be active.

Which would seem to contradict his Minister comments about the problem with DC being that individual workers cannot understand the uncertainty and the inflation risk.

If the best brains in the Treasury and the City of London cannot accurately predict return and risk then what chance does Joe Public have with their DC pensions?

Barnardo's Pension Betrayal

Some things do make you simply despair. Today I learnt that the Charity Barnardo's has announced that it will be closing its defined benefit pension scheme for it's staff without consultation.

Of course it is now back tracking rapidly since UNISON has reminded it that it is legally obliged to consult with its staff before making such a decision.

But how on earth have we come to this place that a previously respected national charity is not only depriving its staff of a decent pension scheme but is planning for them to retire and die in miserable poverty?

Let us get certain things straight from the beginning. Firstly, Barnardo's do not have to close their career average defined pension scheme. It will not get rid of any pension fund deficit since that will remain and now become far more expensive to service. It will arguably make the existing deficit worse and without doubt, cost Barnardo's more money to close it rather than keep it open.

So why on earth are they wasting charitable and public money on closing their scheme?

Not only that but even the Government has accepted that the way pensions schemes traditionally calculate the cost of their pensions is completely nonsense due to outdated and ridiculous accounting measures. The Pensions Minister, Steve Webb, has promised to change this and there is currently an on going enquiry into this matter which some commentators believe could reduce the size of pension fund deficits by 40%?

What is also particularly sickening is that Barnardo's is proposing to offer its staff being kicked out of its existing pension scheme, the poverty pension plan currently offered to new staff members. It will only offer 4% or 6% matched employer pension contributions, which are wholly inadequate and will mean that many of their staff, particularly the low paid will retire and die in poverty.

Is this what they really want? What does the Charities trustees think of this?

If you check the accounts there are 8,366 Barnardo staff who earn less than 59,999 per year. The overwhelming majority of course are on much less than £59k. There are 35 staff who earn £60k - 159k per year, who no doubt earn so much, they will be able to properly fund their pension schemes.

The top earners are the ones who made the decision to close the traditional scheme.

This is all just wrong and totally unnecessary. Barnardo's should be engaged in genuine and meaningful negotiations with UNISON over these issues.

If they don't then, it will just further damage and even help destroy their reputation. 

another busy day for pensions...but is it a good day for future pensioners?

The government today published its white paper on a new "flat rate" state pension for 2017 currently valued at £144 per week. While this is an improvement on the current £107 per week it is expected that in the long term (2060) most pensioners will lose out.

UNISON reminds everyone that £144 is still below the poverty line and Labour Shadow Pension Minister, Gregg McClymont, points out that there will 16 million pensioners in 2017 who will not benefit from the changes and many "Strivers" will be paying extra in National Insurance Contributions.

What has struck me the most about this proposal is the claims that this increase in basic pension will take many people out of means tested benefits so that they will have the incentive to save for their futures under the new pension auto enrolment regulations.

I'm not too sure. Firstly, many low paid are being excluded from auto enrolment. You will have to earn more than £8,105 per year.

Also contributions from employees (3%) and employers (4%) are also just far too low to build up a decent pension and keep the low paid out of dependency upon means tested benefits. In high rent areas if you retire then you are still likely to be on housing benefit and the disincentive to save continues.

But the biggest issue I think is that defined contribution schemes are just plain inadequate. Even relatively good and inexpensive ones like NEST.

Now maths is not my strongest point and this is very much a back of a fag packet calculation. But I have used the NEST pension calculation website to estimate what a male 22 year old on National Minimum Wage (£6.19 per hour 40 hours a week, £12,875 per year) would get if he retired aged 68 after 46 years of defined contribution contributions.

He would receive a pension worth only £1,990 per year (£38 per week) and a lump sum of £22,600. (This is for a pension guaranteed for 10 years after retirement, with spouse pension and pension rises in line with inflation). These figures are subject to stock market performance, annuity rates and not guaranteed.

If he was in a traditional defined benefit 1/80th scheme he would get at least £6,437 per year (£123 per week) and a lump sum of £38,625. He would also get life insurance and ill-health cover. He and his employer would of course have to pay more but the pension would be guaranteed.

Question: So how will you attract the low paid to save for 46 years when they can only expect (fingers crossed) to get a pension worth £38 per week?
Answer: You can't. They are not stupid, they won't do it. Get rid of low pay. Turn a minimum wage into a living wage and auto enrol all workers into a decent defined benefit scheme. Job done. 

Bond Bubble Burst

This could be yet another disaster for ordinary savers thanks to our dysfunctional financial services industry.

This morning I read a newsletter from a respected firm of pension solicitors highlighting 10 key issues for 2013.

Number 8 was to beware of a possible "bond bubble". The concern is that bond prices (government loans called gilts or other traded loans to companies) are so over priced that soon there will be a "crash". Gilt yields (due to high prices) are currently at a 200 year low.

If this happens then the value of personal pensions for many people approaching retirement who will tend to have most of their money invested in bonds will be devastating.

It's complicated because a fall in gilt prices should mean an improvement in annuity rates (the amount of money you will actually get each year if you retire on a personal pension) and will also help out defined benefit schemes. But there is no doubt that if you are in a standard "lifestyle" personal pension plan (which most people in "normal" times should be in) then in the 5 years before your retirement most of your money will be moved away from long term savings in equities and into bonds and cash. A predicted 40% crash in bonds would be a disaster.

As always, wealthy or financially sophisticated investors will avoid the risk. Joe Public will not. This is another reason why individual defined contribution (or defined ambition) schemes are not the answer to the pension problem in this country.

With individual defined contribution schemes (personal pensions in all their shapes and sizes) ordinary individual savers have to take all the risk over their pension fund asset allocation and investment strategy. That is not their job. That is not what they are good at in life. Their funds are usually far too small to be able to afford the expert and ongoing advice needed.

While most trust based collective defined contribution schemes can afford this advice and will hopefully will put in place measures to protect members I cannot see how they will be able to fully protect those about to retire if bond prices collapse. The "market" is not the answer to everything.

The answer is of course decent modern defined benefits schemes for all.

New Pensions Crisis on Way...Millions will get Pension Boost

This morning (2 Jan 2013) I noticed that the entire front page of the Daily Express newspaper (see online page to right with picture of smiling grey haired pensioners) was taken up with this banner headline "Millions Will Get Pensions Boost".

I thought at the time that it was unusual for a tabloid to be saying anything positive about pensions. So I had a look tonight at the online version and found that due to the recovery (or sorts) in the price of shares that the deficits of pension funds had been reduced and the value of private pensions increased.

Which is good thing but hardly news since the recovery of the markets is well known. However, there was a link under the article to another Daily Express article written a whole 2 working days earlier (28 Dec 2012 see left with picture of unhappy grey haired pensioner) with the headline "New Pensions Crisis on Way". 

This alarmist article predicted the end of private pensions by 2050! Now I have posted on a similar misleading article on the "end of pensions" here.

But my point is no wonder people are genuinely confounded and confused by pensions when there is so much inaccurate and sensational misreporting by the media and in particular the tabloid press. Are pensions a good thing or a bad thing? How can you tell on the basis of this coverage. This is one of the reasons why so many give up on saving for their retirement and will end up dying in poverty.

The real problems with pensions is that employers either don't contribute anything or only grossly inadequate amounts and that many of the saving products on the market are simply rubbish. Bad value, insecure, nonsensical accounting and the final pension amount totally at the whim of the stock markets and government policy of the day.

The answer of course is decent modern defined benefits schemes for all. 

The one spark of possible good news for Pension funds (buried amongst the misery of Osborne's statement)

"Discount rate consultation decision could be a lifeline for DB schemes says the AMNT"

The Association of Member Nominated Trustees (AMNT) has expressed its full backing of the decision of the Department for Work and Pensions to move forward with a consultation on discount rate smoothing, announced in yesterday’s statement by Chancellor George Osborne.

Janice Turner, co-chair of AMNT, said: “This has been one of the key campaigns run by the AMNT throughout the two years of its existence and is what long-suffering DB pension scheme trustees have been desperate to hear. The prolonged recession has left trustees and employers facing unprecedented circumstances with deficits so volatile that countless DB schemes have closed and, in some cases, even toppled their sponsor company into closure.

“It is very pleasing that Steve Webb has been the first Pensions Minister to grasp this particularly painful nettle, where others before would not. It is now important, however, that the process should not be dragged out as a stalling mechanism whilst more open DB schemes close. The AMNT will now be working very hard in the coming months to put forward and argue strongly for a responsible alternative to the current unworkable regulations.

Turner continued: “The result of this consultation could be that billions are wiped away from DB pension scheme deficits leaving companies better able to invest in their own businesses. It could be a lifeline for DB pension schemes and aid the recovery of the British economy. For this reason we hope that those thinking about scheme closure will seriously consider awaiting the results of this consultation before taking any permanent decisions on the future of their scheme.”
-ENDS –

Updated AMNT press release. 

My take on this is that it is estimated that the introduction of smoothing and other measures proposed could improve the funding position of defined benefit pensions schemes by 20-30%.  So it is inconceivable that any pension fund should carry on with any plans for closures until the enquiry is concluded. 

"The Emperor has no clothes": but still killing retirement hopes and dreams

This cartoon is from Friday's "Inside Housing" Magazine about the £5 billion Pension Trust which is forcing out, for no good reason, many third sector employers from its defined benefit scheme, while pricing out others due to huge rises in contribution rates.

While I am pleased that Inside Housing has led this debate in our sector and had a news article, analysis and editorial on this subject, it has hasn't quite got it right about some pretty important issues.

1. Why is the Pension Trust writing to employers threatening to force their their workers out of a decent pension scheme on the basis of discredited "mark to market" accounting measures? Why are they increasing contribution rates on this basis to such levels as to force even more schemes to close.?

2. Why is the Pension Trust not talking to the Pension Regulator about extending its deficit repayment period to take into account the 200 year abnormal gilt yields, which are making schemes seem to be in trouble, when they are clearly not? Other social pension funds have done so successfully, why hasn't the Pension Trust?

3. The Pension Minister Steve Webb MP himself has recognised "mark to market" is a nightmare which is killing perfectly good pensions schemes and has promised to do something about it. Why force schemes to close when change is likely to happen soon?

4. Why isn't the Pension Trust thinking about asking the highly paid to pay more? They already pay less than the low paid due to high rate tax relief? Why aren't they encouraging or looking into salary sacrifice, contribution "caps and shares", changes in retirement ages, hybrid schemes or investment fund merger?

5. Was the Housing Charity "People Can" forced into administration by the Pension Trust, discredited pension accounting measures or Government cuts? What are the real reasons? Who is really to blame?

6. The Pension deficit is not "the result of poor returns on government bonds in which the scheme had invested heavily" (page 12).  The problem is not investment returns it is the way you calculate the cost of pension promises (liabilities) which are currently based on government bond yields.  This is absolutely crucial for people to understand. The deficit has increased in the last 3 years even though the scheme investments have increased in value.

7. What has changed? Have people suddenly started living longer in the last 3 years? No, the only thing that has changed is that gilt yields are at a 200 year low due to reasons completely unrelated to the real cost of a pension.

8. So "The Emperor has no clothes" the deficit is not real. So why close and force people out of decent pensions for no good reason?

9. It is a fact that closed schemes become more mature and are forced to have smaller and smaller levels of equities and more and more traditionally low return bonds and cash holding. While at the same time paying the same level of huge fees and commissions.

10. Closing schemes does not get rid of any deficits, in fact they can make things much worse.

TUC Pension Trustee 12: "Tools For Challenging Scheme Closures"

After the opening speeches at last weeks TUC Pension Trustee Conference 2012, I went to the "Tools for Challenging Scheme Closures" workshop led by Hilary Salt from First Actuarial & Neil Walsh, Pensions officer at Prospect.

This workshop, is of course, right up my street. Decent defined benefit schemes are being closed down completely unnecessarily and being replaced usually with third rate, inadequate alternatives which will result in employees being dependant on the state when they retire and then dying in poverty.

The first tool they described is a "tape measure". How you measure your pension liabilities? At the moment the tape measure used (the yield in Government loans called gilts) is broken. Due to Quantitative easing and the so called "flight to quality" from the weaker Eurozone countries, gilt yields in the UK are not only historically low but even negative. Pension liabilities may have increased during the last 12 months but nothing has really really changed. It is the broken tape measure.

There are a number of things should be considered long before closure :- tiered contribution levels, changes in retirement age, CARE (career average) rather than Final Salary, reducing  accruals, longevity adjustments, caps on salary, inflation measure, contract back into SSP, Cash balance schemes, hybrid DB/DC etc.

Trustees should also consider the "Sledgehammer" approach of winding up schemes if closed.

All schemes are different and trustees must refer to the trust rules and make sure they get truly independent advice. If contributions have to go up then time with any pay rises and consider salary sacrifice.

CARE schemes are not only fairer but if risk is the real driver for the employer to close the scheme rather than cost then they will reduce salary risk. Consider risk sharing such as contribution caps.

In the Q&A I asked about the argument that closing schemes did not get rid of the deficit and that they can make things worse. Hilary said that this can be true and that a closed defined benefit scheme can be as inefficient as defined contribution schemes. They become like annuities invested solely in gilts and cash.

Hilary has recently written an excellent booklet for the TUC on "The Future of Defined Benefit Schemes" here.

While the Association of Member Nominated Trustees (AMNT) will be producing their own guide on what to do if your employer tries to close your scheme on December 11 at our AGM. 

Some good news on housing workers pensions! But...

This is a rather rare title for a post on pensions! However, well done to Housing Association Plymouth Community Homes who have decided to keep their 60th Defined Benefit scheme with the Social Housing Pension Scheme (SHPS) open and absorb the extra costs imposed by the SHPS.

There are still some changes which UNISON members are unhappy about such as move from RPI to CPI and the charging of pension contributions while on maternity leave.  But PCH obviously care about their workforce and take their duties as a responsible employer seriously.

They do not want their employees to retire and die in poverty. Unlike some it would seem who not only want to close their Defined benefit (DB) scheme but replace it with a pittance of a Defined Contribution (DC) scheme. In a recent report by a leading Actuary, in a DC scheme you would need to invest 22.9% of your pay to get 53% of final salary pension (twice as much as a DB scheme!).

Yet some employers are proposing to pay only the new national legal minimum of 3%. This will mean as mentioned above that their staff will not only die in relative poverty in their old age but the taxpayer will also have to subsidise their pensions to keep them out of absolute poverty.

SHPS and its parent organisation, the Pension Trust, tries to justify increases in contributions by pointing to a supposed rise in "liabilities" (the future expected costs of giving members pensions) yet even the Pension Minster, Steve Webb MP, recognises that the way we calculate pension costs is practically meaningless and is destroying perfectly good pensions schemes.  He has committed to change.

Employers need to get a grip and challenge the assumptions being made and the contributions they or their employees are being expected to make. I am not at all convinced that this contribution rate increase requirement by the SHPS is at all necessary and I hope they seriously take this up with them.

I am dismayed that SHPS are not engaging with UNISON's proposals about practical alternatives to contribution rises. The Local Government Pension Scheme is very similar to many SHPF schemes but has been able to avoid increases in contributions for most of its members by working in a partnership with the trade unions and employers. This has brought about radical but thoughtful and intelligent change.

There was no consultation with the trade unions whatsoever by the SHPS before they decided what they wanted to do and no interest shown in any real partnership working.

One of the irony of ironies is that a major reason why some SHPS employers want to close their scheme to existing members is because they have closed it to new members joining. Quite rightly pensions contributions have to be increased if a fund is closed. SHPS have to charge more (I think 3%) since in any closed scheme the investment returns will be lower and the costs higher. This is just madness. Why condemn your staff to a miserable old age for nothing? Cut costs and re-open those schemes to new blood.

Closing your DB scheme does not make it any better, it does not get rid of any deficit (real or otherwise) it just makes it worse. Increase contributions on your staff by too much and they will just walk away from it, the scheme will then fail and the employer will be left to carry the can.

UNISON has recently published an excellent guide on the proposed changes to SHPS and later this week we are holding a national training event in London on it. 

Only worry about your pension if there is another Russian Revolution...

I recently went to an "off the record" Chatham House rules debate on whether closed defined benefit pension schemes should invest in equities (shares) or not?

Now, I doubt very much that all that many people will share my keen interest in such matters, but if you currently contribute to a funded defined benefit pension scheme or if you have a frozen one from a previous employer then you should. 

This is your money, your "deferred pay" and unless you at least try and take an interest in it then who will you blame if it all goes horribly wrong? 

The argument goes something like this. Pension funds which are "closed" (for some reason it wasn't made clear in the debate but I assume it was funds that were closed to new members and future accrual of pension benefits by existing members) are concerned about the long term not the short term and that the strength of the employer "promise" to the scheme to fund it until it pays out all its obligations is more important than anything else. Such schemes can afford to hold illiquid assets which have attractive tax efficient returns with a low probability of risk. So why invest in risky, liquid and unstable equities? 

The alternative argument was that equities should be part of a mix of investments. Admittedly returns in equities in recent years have been appalling but "No means Never" and you should not throw the baby out with the bath water. UK Pensions PLC have massive pension shortfalls in funding liabilities and the only way to close this gap is the long term historic out performance from equity investments. Past performance is not guarantee of the future but the long term equity premium over bonds is an accepted market compensation for risk. 

Why this is important is that if the trustees of your pension scheme gets this equities and/or bonds decision wrong, then your scheme may end up in the tender mercies of the Government Pension Protecting Fund (PPF).  The PPF is a very good thing but most people would lose out financially if their pension had to be rescued by it. 

So the lesson is if you are in such a scheme then take an active interest in it and in the trustees that run it on your behalf. Read the stuff they send out to you, ask questions, take part in elections of member nominated trustees, turn up to any meetings and even consider standing yourself to be a trustee. Make sure that your scheme is run in the interests of the beneficiaries and not by any vested interests (and there are many). 

Apparently there is an argument that the only real danger to equities not out performing bonds is if the economy suffered from something completely dramatic as the Russian revolution of 1917. 

I hesitate to point out that next week is in fact the 95th anniversary of the Bolshevik Revolution and the Storming of the Winter Places. I hope they will keep "Pleb Gate" locked up for this anniversary.

Update: I have just been reminded that the number one issue with closed schemes is that they cost far, far more to run when closed than if they were kept open. Pension funds need new blood, new contributors to stop them becoming mature and cash deficit. Millions of workers are simply being cheated and conned out of a decent retirement while employers are often being mislead and badly advised. While many DB schemes and Government regulations need to be updated they do not have to be closed. If they are closed then it is in the real long term interests of the workers and employers that they should be reopened. 

'Find it, Get it, Get rid of It' Argos staff Pension scheme

 Workers at retail giant Argos have started 4 days of strike action to save their pension scheme from closure.

Unite reports that "1,200 drivers and warehousemen have been on strike this week at the Argos distribution centres at Basildon, Bridgewater, Lutterworth in Leicestershire,
Heywood in Lancashire and Castleford".

They have been striking since Wednesday and the strike ends at 6.00am on Monday (24 September). Argos want to close their defined benefit scheme and replace it with a money
purchase (defined contribution) scheme worth 50% less.

I haven't got all the full details but it seems so far that Argus are claiming they have to close because the scheme is in "deficit".  This excuse is usually rubbish. 

If your employer claims that it has to close its pension scheme then firstly consider the following "Rules" (Excuse me for SHOUTING but it is important).

 

Rule Number One: Closing your pension scheme DOES NOT GET RID OF THE DEFICIT it could MAKE IT WORSE! If you have a deficit then it still remains on the Company books even if you close it to future contributions.

 

If you close the scheme you have no new money coming in and have to sell your best investments to pay existing pensioners. This is crazy. All you do is hand out a blank cheque to your advisers to run a smaller and smaller, ever more expensive liability with little or no chance of any upturn.

 

Rule Number Two: Your so-called pension deficit figure IS NOT REAL, it is measured in "FUNNY MONEY". Pension deficits are worked out according to something called "mark to market" accounting. Which is completely lala.

 

The deficit for many schemes can vary day to day, week to week, month to month, by millions and millions (and even more for bigger schemes) of pounds, regardless of the real strengths of the fund.

 

Not only that but many schemes are valued according to the interest rate of UK government loans called "gilts" (don't ask). Due to the current completely bonkers Alice in Wonderland economy, these gilts return are currently at a 200 year low, yet they are still used to decide whether your pension scheme is in good shape or not! MADNESS.

 

The Government Pension Minster, the Bank of England, the CBI all recognise that this is nonsense and things will have to change, but so far they have done nothing. But why close your scheme forever, when you know that its rules will change soon, for the better!!!

 

Rule Number Three: Unless your employer contributes enough money into a decent pension scheme you and your spouse will retire and DIE IN MISERABLE POVERTY.

 

There are Rules Number Four/Five/Six or even Seven: but they don't really matter. Rule Number Three trumps them all.

 

There is more stuff workers and trustees can use. The AMNT will be publishing a detailed guide to help trustees defend their scheme soon. We will also give personal help and support to any AMNT member trustees facing this problem.

 

Good luck to the Argos strikers fighting to defend their futures.

UNISON members Vote by 90% to accept new LGPS!

Great news. UNISON has announced that members voted in a secret ballot by 90% to accept the new Local Government Pension Scheme 2014. Ignoring the moanie, fibbing misrabalist rejectionists who for selfish sectarian reasons wanted them to turn down a good offer to indulge in pointless strike action and the inevitable "glorious defeat". On Monday the GMB voted by 95% to accept.

While there were some who had genuine doubts about the new scheme, I would hope that everyone (apart from the miserablists who will be crying betrayal) will rally around the new scheme and encourage the shocking 25% of those eligible who haven't yet joined to join. There is still further work to be done especially around member representation and governance. The new LGPS will be a fair, affordable and sustainable model for a rebirth of private sector defined benefit pensions scheme.  In the meanwhile we should be also looking at encouraging other employers to consider joining.

This result will also encourage the union's in forthcoming campaigns since we can demonstrate that by a combination of rational argument, mobilisation and targeted collective action we can win for our members.

Update: Unite members have also voted to accept LGPS 2014 by 84%. Hat tip UNISONactive