Government interference into pensions has led to excessive
red tape. Colin Singer explains why the Pickering Report could help employers.
The time has come for the Government to start trusting employers once again
in the provision of pensions. It should not be micro-managing company pension
schemes.
While it has been done with the best intentions, in reaction to Maxwell and
the mis-selling scandals, the interference has led to excessive red tape, a lot
of inter-linking between private and state pensions and too many specific
impositions on employers.
Fundamentally, it has racked up the cost of providing pensions for employers
who are, after all, not obliged to contribute towards the welfare of their
employees in their old age.
Companies have a difficult balancing act dealing with the conflicting interests
of shareholders and employees. We have reached a point where firms are
struggling to justify to shareholders the cost and financial risks of running a
traditional final salary scheme, with all the guarantees imposed by successive
governments.
Trade unions and the national media reacted negatively to Alan Pickering’s
government-sponsored report, A Simpler Way To A Better Pension, which was
released last month. In particular, they criticised his suggestion that
inflation-proofing and survivor benefits should no longer be obligatory.
This is a knee-jerk reaction: it is just these sort of requirements which
are encouraging employers to switch away from defined benefit (DB) to defined
contribution (DC) schemes, which carry less regulatory baggage.
It is not just the volume of the regulatory burden that is the problem –
some of the specific impositions on employers wishing to provide retirement
income for their workforce are anachronistic and potentially unfair.
Take the obligation to provide survivor benefits. Not only do such benefits
originate from a time when it was assumed that only one partner would be in
pensionable employment, but those who have spouses and dependants are in effect
being subsidised by those who do not.
Employers should have the flexibility to offer a higher basic level of
pension for all but with a lower pension for those wishing to take the survivor
benefits options. In effect this is what happens for those in personal pensions
when they come to buy an annuity. The individual gets to choose whether they
want a spouse’s pension or inflation proofing. Instead of a one size-fits-all
solution, it is recognised that different people have different financial
requirements.
This is actually about restoring the balance between employers and employees
and giving some badly-needed incentive for employers to review the relative
attractions of DB and DC schemes on a more level playing field. Anecdotal
evidence points to pensions rising up the list of issues for those considering
changing jobs.
Quality pensions provision looks destined to become increasingly important
in the battleground of employee attraction and retention, and it would be nice
to think that it will not just be senior management who have DB pensions in the
future.
In the short-term at least, few HR professionals are likely to be able to
secure additional funding for employee pensions beyond the financing promises
already made. But if Pickering’s proposals were to be taken up, they would at
least provide employers with the flexibility to design – within their financial
constraints – the best value and best targeted pensions for their employees.
This could include an element that is protected against the ups and downs of a
volatile stock market.
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The Government is expected to issue a Green Paper on pensions in the autumn
outlining its reforms. HR professionals should hope the Government takes
Pickering’s recommendations on board and starts trusting them with the
flexibility to provide the pension plans that best suit their employees and
their business.
By Colin Singer, a partner at Watson Wyatt LLP
