We have a generation of people, fast approaching forty years of age, who do not own any property and have little or no pension provision. It is a social car crash waiting to happen and, if not addressed, will leave an entire generation facing poverty in old age with total reliance on the state.
This emerging challenge, on a social scale is, in my opinion, as great as that faced in the early 1940s which was addressed by the Beveridge Report and the establishment of the welfare state to combat poverty. It was a revolutionary moment; such a moment is now required in pensions.
I argue that the design of ‘wage in retirement’ occupational pension schemes running alongside one’s state pension is the only real way for millions of working people to have dignity and security in retirement. This was, of course, the gold standard for many years until a catalogue of deception from governments, unscrupulous insurance companies, and criminal or greedy employers devalued such expectation.
An example was the Maxwell scandal in the 1990s, the response to which was legislative and regulatory actions that have stacked the odds and the desire against occupational Defined Benefit (DB) schemes.
We have seen the closure of DB schemes at an alarming rate and a total lack of innovation in the pensions space; the only show in town has been Defined Contribution (DC) schemes.
This environment has arguably been a motivator for employers to move away from DB schemes and adequate pension provision in the interest of ‘fat cat’ salaries, increased profits and shareholder return, rather than tackle pension deficits or provide appropriate contributions.
Auto-enrolment and totally inadequate DC provisions may tick the box that says “do you provide a company pension?” but will disguise the fact that the outcomes from these provisions will be nowhere near adequate for a dignified retirement.
The pensions industry is walking on the other side of the road in regards to the end game of current provision; the promotion of DC schemes for a huge percentage of working people has passed the baton of responsibility to individuals totally unequipped to deal with it.
Of course, the other major threat to dignity and financial security in old age is the rise of casual and insecure employment; education and innovation is also desperately required in this area.
In the last two Queen’s speeches the Pensions Bill announced the opportunity to deliver Collective Defined Contribution (CDC) pension provision. Royal Mail Group and the Communication Workers Union will be at the forefront of that development having negotiated and designed a new DB/CDC scheme which is awaiting its introduction following the successful introduction of the Pensions Bill.
Faced with the seemingly impossible dilemma of circa 80,000 employees in a DB scheme facing complete closure, and 40,000 employees in a DC scheme which had not driven the right individual behaviours in regard to saving for old age, the negotiating landscape was ominous. However, with necessity being the mother of invention, a driving force emerged in the sometimes acrimonious climate, based on both parties seeking a consensus on what people need, or certainly the people we were both representing.
That consensus was a wage in retirement running alongside one’s state pension and the need to develop a scheme design that can honour the principles of traditional DB scheme whilst giving greater risk-sharing rather than placing the whole of that burden on the individual or the company.
With a renewed sense of purpose, and the help of a few brilliant experts, we began to develop the art of the possible and out of that emerged a new scheme. It is based on the design of a traditional DB scheme i.e. a lump sum at retirement based on 3/80th of pensionable pay plus increases (which is DB in nature), and a wage in retirement based on 1/80th of pensionable pay plus increases. The design seeks to achieve the same outcomes as the DB scheme which was facing complete closure.
The shared risk element is the fact that the outcomes are not guaranteed and can be subjected to cuts on the journey. However, the very robust modelling for the investment strategy going back to 1925 shows great reason for optimism with only two potential cuts in 1932 and 1933 during the Great Depression. Equally though, the scheme would not have to close at any time during that period, would achieve its targeted outcomes, and would hugely out perform, thus providing far greater value for money than DC provision.
By Terry Pullinger, Deputy Secretary Postal, CWU