Kevin O’Boyle, Head of Pensions – British Telecommunications
Louis Parperis, Director of Human Resources – Bechtel Ltd
Richard Wilson, Senior Policy Adviser – NAPF
David Burton, Independent Financial Adviser, Pensions – Lorica Consulting
Elaine Gibson, Senior Policy Officer – Institute of Payroll Professionals
Barbara Henwood, Vice President, HR [Europe] – Warner Bros. Entertainment UK Limited
Anne-Marie Winton, Partner – Nabarro LLP
Logan Anderson, Head of Customer Relations – The Pensions Trust
James Rapinac, Director of Marketing – Gallup
Tobin Murphy-Coles, Director of Flexible Benefits & Marketing – Lorica
The state of pensions is well reported in the media, much of it relating to an existing, serious crisis and a long-term outlook that looks decidedly bleak. For our generation to concede that the problem is insurmountable will go down in history as hugely irresponsible, and to delay taking action is not an option. This is the mandate of theHRDIRECTOR Pensions strategy roundtable
Pensions is the veritable hot potato for Government, employers and society at large. All statistics demonstrate that the impact of a failed pensions system will be catastrophic, and issues such as an increasing pension age generation, longer life expectancy and fewer young people coming into the workplace to contribute to the pension fund are conspiring to prove the statistics correct. What are the key considerations for a route forward for pensions, one that is sustainable and practical for businesses and employees? The profile of pensions has been rocked and shaken integrity has been eroded, and pension performance has not delivered. What has been learnt from the crisis and what is the route forward?
Let us take stock of the state of the pension crisis from various perspectives. To begin with, the public sector.
Logan Anderson: I can give a voluntary sector perspective on defined benefit schemes, we find a lot of finance directors in particular inherit defined benefit schemes in the sector and they’re like a millstone around their necks. They’ve got to do something with them. We’re finding more and more in the voluntary sector, in particular, that recruitment has taken place from the private sector where pension risk on the balance sheet is not to be tolerated.
Tobin Murphy-Coles: Business is contending with the ramifications of a recession. And final salary schemes is something that needs to be dealt with urgently. There is a conversation to be had about compulsion, and in isolation each of those issues will merit a great investment in time, resource and energy. All these are issues that need to be addressed in the public or private sector. Businesses have made redundancies, frozen salaries and they’re left with money that contributes to reward packages every day. Some of those are contractual; some of those aren’t. They might have to make some sacrifices on reward packages over here to fund all of the things that we need to do over there. Consider that for a moment, it’s an ironic position trying to cater for a piece of legislation which is coming through.
It would be interesting to hear an HR practitioner from an organisation to give their perspective on that.
Louis Parperis: When I joined Vector there was a lot of focus, because we had a final salary plan in practice and people were worrying about these benefits that were being paid out for people who worked for us many years ago. And what struck me was, whenever pensions is brought up as a subject, it’s always the need to educate your members. For me it was actually the need to educate the people running the business to get them to understand.
Kevin O’Boyle: There’s one issue around what you do for the future and then what you do about meeting your obligations promised in the past. Now DB schemes have got more expensive for such reasons as regulations, more people living longer, investment returns and different investment strategies.
Anne-Marie Winton: When we talk about an occupational final salary scheme, we’re talking about a trust. The law that applies to running multi-million (and multi-billion in some cases) schemes is based on medieval trust law concepts. If you were going to design a system, would you pick this as the one to use?
Tobin Murphy-Coles: It’s interesting the comment you made around trust and medieval in concept, if only by law. Particularly in an occupational DC world, businesses are still choosing to have pension schemes where the trust is the mechanism that runs it. Why are we still choosing to run our pensions schemes using that model?
Because people trust the word trust?
Tobin Murphy-Coles: People are still being recommended that a trust-based scheme is the right way to move. And I’m not convinced, given all that we know now, that it is.
Kevin O’Boyle: I could be very cynical in saying that advisors who advise trusts potentially get more ongoing fees from ongoing trust support than if it’s a contract. But actually, in the last 12 months or so, where there have been significant changes around DC, anecdotally I’d say the majority of schemes are actually going contract now.
David Burton: Can I just add something to that? Over the last ten to 15 years we’ve been looking at company pension schemes, often you go in and see somebody who is actually closing their defined benefit scheme or they’ve closed their defined benefit scheme and moved to a DC occupational scheme. And you try and establish why.
Louis Parperis: But then I think with contractbased schemes there is a lot of education you need to do for the employee population. And it’s interesting, reflecting on where we are with our stakeholder fund against where we are with trust and thrift in the US, our US employee population has grown up in an environment where it looks at the market and people are active in the market, and they understand.
We need to go back to basics then?
Louis Parperis: There needs to be a grown-up debate about what we are to do. Because what we’re doing as taxpayers is pouring out a load of money and not seeing particularly good return for it. I don’t think anybody wants to see poor return for the money that they’re paying out. But that is not just about what we do in one niche of the benefit sector. It’s about the total benefit package.
At the heart of the problem is communication. Pensions are boring.
Logan Anderson: Whether we call it pensions or whatever we call it, at some point in our lives due to a variety of factors, we will be incapable of working. When you cease working, you have to carry on living and feeding yourself. We need to drill people early. Eighteen doesn’t seem such a daft age actually to start thinking about these concepts. But, they have so many other things going on at that age.
Richard Wilson: Many of our employees don’t seem to understand how much time, effort and resources we’re putting into this pension scheme. Obviously there’s the more traditional things you can do. You can have those pension forums where you go in, and it’s the kind of thing I’m sure others are doing in their workplaces as well; people giving presentations to employees and scheme members, talking to them.
What about the belief of what will actually come to fruition in 30 years time?
Tobin Murphy-Coles: There are people that get very involved in their pension scheme and I think that often as an industry we get hung up on the wrong things when we’re putting some pension schemes in place. A large proportion of people go into default funds, is it really important that that pension scheme has 100 different funds that you could potentially choose between? The fundamental question is, before anything else, are you going to join?
Logan Anderson: I think reforms are quite important because it’s recognition that personal pensions are probably more important than most of the other benefits that are on offer. We need to get everyone into a pension. And, in fact, we’ll get people over that first hurdle by the fact that they will be also enrolled into a pension scheme, which is something we’ve been supportive of. And that will get people over the first hurdle.
Demographically it’s a challenge. More people over retirement age than there are under the age of 18.
Barbara Henwood: Younger people have a completely different outlook. They will take an awful lot longer to get financial stability. People are starting much later, in terms of being financially stable and savvy. So realistically, they’re the people who are going to have to make a decision and say, actually, I don’t want to be in this pension.
Tobin Murphy-Coles: We do need to stop referring to it as a pension! Employees must have a number of tools that they can access so they can model their finances, and this could be online; to actually make some decisions at that point. The older employee must have really good advice. But the problem that my industry is facing at the moment is retail distribution review. But at the top end, education and advice are integral.. but who’s going to pay for that?
Louis Parperis: There also needs to be a political structure around the change, that makes the difference. There are lifestyle events that everyone will expect, irrespective of whether they have family or don’t have family. You’re going to reach a certain age after which you will not be capable of working as effectively, where you’ll feel tired and you’ll want to pull out of employment.
Fundamentally, pensions are a collective responsibility. Everyone must shoulder that responsibility?
Tobin Murphy-Coles: Possibly, but controls would help that. But I do agree with Louis in the sense that it seems absurd that someone might be in the position where they’re just about to have their home repossessed and they’re sat on a fund of money which they could access.
Elaine Gibson: I think it probably is going to be more attractive to younger people. Actually the age that it fits under consultation now is to introduce people into that when they’re the age of 22. So I think it probably will be more attractive to the younger age group. At least the National Employment Savings will draw people into the ring.
Anne-Marie Winton: What worries me most with NEST is the maximum contribution of £3,600. That goes back to the same idea of having a minimum funding requirement. Exactly the same thing will happen; there’ll be a belief that £3,600 is all you need to save for the retirement. I have a real fear that whilst there may be very successful engagement in NEST, it may completely miss the point by giving jobholders the incorrect impression that NEST is all you need for pensions saving.
Logan Anderson: We have the big fear that the default level will become seen as the benchmark level, three percent employer plus five percent employee contributions, on banded earnings. Obviously, there are so many pension schemes out there now that are paying so much more (and quite rightly to) are because you need currently at least, if you’re an average earner, double that amount to get anywhere near the kind of pension people are expecting.
What do forecasts suggest NEST will achieve?
Richard Wilson: The NEST commission did say that this minimum level they’re putting in was, for an average earner, supposed to get you halfway towards where you need to be with your private savings. So if you look at what you’re going to get from the State and then you add on eight percent over 30, 40 years, that’s half of what you need. We have to encourage people to do more on top of that.
Barbara Henwood: The other question is mortality rates. For the 25 year old today, the mortality rate when they hit 70, it could be 120. They could have a good 50 years post-retirement in which they have to maintain themselves. Logan Anderson: A point about honesty of employers. We’ve got a trust-based DC arrangement that several hundred employers participate in and we go out to try and educate members. The aim is to try and get those members to join, it’s a very evangelical mission based on trust and honesty.
Richard Wilson: We’re debating how we can help employees to save as much as they can and we ignore the moment when they have to realise that pot of savings and do something like purchase an annuity, which can fluctuate in value by plus or minus 15 percent on a given day. And for me, one of the bits that’s missing from this education piece is helping people through the maze of knowing when to join, how much to invest, where to invest.
Logan Anderson: Around 80 percent of our members go for the default options. Default is a terrible name. Default means bankruptcy. It’s one of the many things, like the word pension probably, that we need to change. The majority of the effort that we expend as far as investment is concerned is making sure that the default funds are the absolute best. I think IFAs often sell to people like themselves. They don’t sell to members.
Tobin Murphy-Coles: Maybe that’s what we need to do, we need an app on an iPod or whatever. Here’s your future, take control.
David Burton: I think education is definitely the answer. I think you’ve got a generation out there who’ve seen parents, people who’ve retired in the last ten years, an awful lot have retired on final salary pension schemes. How did they get in them? They joined the company when they were 18; the company said, you’re in the pension scheme. They didn’t have a choice. If they had, they probably would have opted out. But aged 60, 65 they think, thank God for that.
Barbara Henwood: The PAYE workforce is rapidly decreasing. There will be lots of tiny little bits of pensions sitting all over the place. Controversially my question is, are company pensions actually the way forward for that generation?
David Burton: I’d like to try and answer that one. Contract-based schemes show on the pension breaks in a company pension scheme. When I actually sit down with somebody I say, this is a company pension scheme but it’s not a company pension scheme; it’s your pension scheme. It is a personal pension that belongs to you, you take it with you. You transfer money into it. You can do whatever you want with it. It’s yours.
Do you think there’s a case to say that people could have immediate benefits if they take their long-term pension preparation more seriously?
David Burton: I think tax breaks can be a great motivator if people actually understand them. Plus the message is quite plain: “If you can’t give up five percent of your salary now and live on 95 percent, how can you live on less, later”?
James Rapinac: It seems like a lot of what we’re talking about here is that there’s a shift from paternalism to individual responsibility and I think that’s fantastic in theory. The big issue I think we’re going to be facing in the United States is in theory it’s wonderful that everyone’s taking responsibility for managing their 401K and saving in their own individual way for retirement, but I think what’s going to happen, starting with my generation and younger people, is that people are going to get to retirement age and they don’t have enough saved up.
Giving the individual the choice and responsibility for their own decisions is a nonestarter. It’s mandatory or nothing.
Elaine Gibson: The Government should have a drive to encourage more professionals into the pensions profession so that there’s more people to educate about pension schemes; helping them to make their choices.
Richard Wilson: If you sat a pension provider, an employer and a consultant or an IFA in the room, everyone would agree that education is fundamentally important, but nobody wants to fund that. Educating people on a one–to-one basis is not a cheap thing to do.
Anne-Marie Winton: With my lawyer’s hat on, the fear is, when does education become advice? The courts have made it very clear that trustees cross the line and give what looks like advice to members, they will face sanctions and can be held responsible for what they say. But yet if you read some of the consultation documents about NEST, it’s very clear that the government actually wants employers to feel enabled to cross that line. I’m not sure how that will work in practice.
Richard Wilson: We did a report last year called Talking Pensions and we asked lots of employers what they felt were the issues, talking about pensions with their employees were, and it’s clear that people were very, very concerned. They didn’t know where the line was so tended to be too cautious. But actually a lot of them did want to talk about their pension scheme, did want to be helpful when their employee spoke to them and asked them questions about the scheme but felt they were being forced into a situation where they couldn’t say very much.
Anne-Marie Winton: The very latest information about DC member communications is that they should be bespoke for the particular member’s circumstances. But I do not see how you’re going to do that with a nationwide scheme like NEST.
Logan Anderson: It’s hardly surprising that HR professionals whose expertise is in HR more than comp and bens, feel rather frightened about talking to their staff about a scheme that they’re putting loads of money into and dedicating resource to if they don’t know where that line is.
This is really the subject that nobody dares discuss.
Logan Anderson: Well in our business there used to be a very neat way around it, which was the fact that the pension or life company would fund us to go and talk to staff. And that’s really quite neat. We were empowered and it didn’t cost the employer anything. The life company benefited because we could drive contributions to a higher level.
Richard Wilson: What I find interesting is that any 18 year old on a checkout can sell you a store card with 20 percent APR, yet the feeling is, if you talk to someone about pensions, you’re going to have the full weight of the FSA bearing down on you.
Louis Parperis: James mentioned what happens if there’s a 401K collapse and people end up sleeping on the streets and whatever, and we ought to be concerned about that. If you go to south east Asia and just walk around Hong Kong or Kuala Lumpur or Jakarta, you’ll see an awful lot of old people sleeping on the streets, and that’s the accepted culture.
Has Government and the pension sector really got a cohesive grip on long-term planning?
Richard Wilson: We were discussing earlier that 80, 90 percent will go into a default fund, and people will be in that fund if they don’t transfer and do all the things that they should be doing, they can be in that fund for a long time. So you need to be thinking about what is your default fund, what’s the government arrangements around that, whether you’re trust-based or contract-based, and are you picking up options that’s got good life styling capacity?
Kevin O’Boyle: I think long-term it’s a key matter of getting rid of that word pension. It really does need to be changed to savings or whatever because the world has moved on. Pensions are by no means particularly attractive for all. They get some tax benefits, but not a lot to tie up your money for what effectively is forever. Then being forced to hand it over to an insurance company, in the main, is not a good deal. So I think the world is actually moving towards more savings less pension, in a wider sense. Flex, I think, gives people the opportunity to receive some money and it be paid in ways that meet the individual.
Elaine Gibson: Another way that some large organisations, will make pensions attractive is the salary sacrifice. So sacrificing a portion of salary, you still get the same remuneration package, but the tax breaks are better with the salary sacrifice.
Logan Anderson: I think salary sacrifice has a part to play in the long-term planning. For me there’s three things that come up constantly and I’ll just dip into each of them. One is benefit audits, auditing what you are currently spending as a business. Salary sacrifice figures into that because although pension is absolutely viable on a salary sacrifice basis.
Does technology hold the key to communication? How would people integrate with it?
Tobin Murphy-Coles: Technology companies, such as ourselves, are investing huge amounts of money in developing technology platforms to engage employees and communicate in terms of reward etc. HR system software providers are also entering the same space. And effectively, what we’ve started to see now is a war for data.
So there’s the potential for it becoming quite viral and uncontrollable.
Tobin Murphy-Coles: It will possibly get to the point where a number of these benefits that we’re talking about or products aren’t company sponsored. You will be able to acquire them in an open market via technology platforms that you have access to.
So how are you going to ring fence that and make it controllable?
Tobin Murphy-Coles: Jason, I don’t know if you can at the moment, until it becomes clear what it is that all of this investment, particularly from the life companies, is going to look like when it finally hits the market. I think from a company point of view the one big part that I think technology can play from an education point of view is that what is clearly going to happen as the commission market erodes is that advising or educating employees is going to split itself into two sectors. For us, it is worthwhile sitting and speaking with people that have significant financial decisions to make. Educational advice is really important.
How important is it for people to understand how transportable their pensions are?
Logan Anderson: It’s a fact of life now, and I think someone else made the point, that people tend to be fairly transient in their working careers. I think technology will have a part to play, certainly in understanding that. But in terms of the way that pensions are structured going forwards, and it’s increasingly the case, employees shouldn’t be penalised if that’s the way that they tend to want to live and work through their lives.
Anne-Marie Winton: We will have some employees genuinely confused about the portability of their pension arrangements. They will look at the booklet they were given when they joined an occupational scheme and it will say you can’t be a member of an occupational and a personal pension scheme, even though that is not the case now. And that will confuse people.
So how do we overcome that issue of confusion in going forward?
Anne-Marie Winton: We need a campaign. We need something to say that pensions are sexy. The technology angle is very interesting but begs the question what will be the way in which people in future access information? If you put pension information in the monthly payslip, people will get worried seeing figures going up and down and will not know what to do. I would probably favour pensions information being provided on a monthly basis, even if it’s saying, pension savings zero as a constant prompt that you’re not savinge enough.
It’s actually getting it into debate; stimulating interest.
Tobin Murphy-Coles: You can view your total remuneration statement via an app. I think that we need to think about how we best use that type of communication material to actually point out to employees, even if it’s something as simple as they haven’t joined a salary sacrifice scheme and you have missed out on X amount.
The “live for today” attitude does nothing to help build a long-term mindset.
Louis Parperis: Pensions ought to be seen as a long-term strategic issue and yet we go into it short-term tactical management thinking, which is driven by balance sheet issues, which actually, I don’t think, should have all that great an impact on the decisions that are taken.
Logan Anderson: I do think compulsion has a part of play, but compulsion can’t be a tactical strategy. So one of my issues with NEST, as it is at the moment, is that it stands to reason whether you believe compulsion is right or wrong, that as it stands at the moment, the way that it’s structured, it is likely that some businesses with either A, go under or B, have to sacrifice something to afford it; both of which conversely could put pressure back on the state, which is the entire reason of putting NEST in, to alleviate the pressure on the state.
Elaine Gibson: For the lower paid sector workers, those things tend to give. And I think pensions fits alongside that. It’s not a priority when you’re trying to make ends meet and wondering where your next bottle of milk or loaf of bread is coming from.
We seem to have been talking about larger organisations and their corporate schemes as well but with NEST we’ve got the phased in approach for the larger employers but the SMEs are not coming on board, the small employers, until 2017. And I think that’s going to be more of a big bang approach as opposed to a gentle transition into NEST.
A lot of small and medium sized companies have no sort of history with pension contributions. It’s going to be a new concept. How’s that going to affect hard strapped businesses?
Anne-Marie Winton: Legally it’s going to be an offence to encourage employees to opt out, but practically some employers will encourage employees to opt out because the employers won’t be able to afford the NEST contributions. And who’s going to shop them?
David Burton: I think that, going back to Logan’s point, I think compulsory is good. I think how you fund it is a different matter. I think there may be issues for some employers. Most employers aren’t aware of it. If you say to employers that we’re going to put this thing in but if we put it in, if you all join then we’re going to lose 20 employees, what do you want to do? I’m not sure whether that’s asking people to volunteer to opt out or not but it’s actually giving them the choice.
Logan Anderson: I think that any employers that go out of business because of personal accounts or NEST are going out of business anyway, and I don’t think that NEST’s going to be the tipping point.
Tobin Murphy-Coles: I think government has a part to play in that as well. If what we pay into the pension scheme is effectively the net cash that we have left over at the end of the month once we’ve done everything that we need to do, there are a number of things, and salary sacrifice is one of them, that the government allows us to do to make things a bit easier for us, like the provision of child care.
Louis Parperis: I think the government actually should consider giving companies who provide independent financial advice to employees who are about to examine the annuity market, I think giving a tax break to companies for that, which is one of the most complex and complicated decisions that anyone is ever going to make, I think that would be money well spent and would at least give me some greater confidence.
Tobin Murphy-Coles: I think that should apply not just at annuity stage. Any financial advise in the workplace, I think, there should be as many breaks and benefits as possible in that respect.
Richard Wilson: And certainly not a P11D charge.
David Burton: But part of the long-term strategy has also got to be getting people to think about what retirement actually means. It’s not age. It’s nothing to do with age. It’s hopefully when you’re ready. But people in the future are going to have to think about working longer. By 2020, I can’t remember the figures, I think it’s 20 percent of the population who are retiring will not have enough income to retire on. They will rely on selling their property, relatives and savings. So the problem is already there.
Kevin O’Boyle: One of the key concerns I have with NEST, and I would support compulsion because auto enrolment and re-auto enrolment are just a waste of time, you may as well just bung them money in the first place and be done with it, is at the rates that people pay in it produces virtually nothing. And even if you put in the maximum £3,500 you’d be lucky to get a pension of £100, £150 at retirement. All that will do, and obviously it depends on the welfare state in the future, is disenfranchise you probably from means testing. There’ll be some form of means testing and support for the poorest people, so these people are really throwing away their money. And having aid that, international experience suggests that when governments start with a low employer contribution they soon find it’s not enough and force it up and Australia is a prime example.
Should Government take more of a role in terms of pushing the incentives and pushing the advantages of getting involved with a pension?
Logan Anderson: There’s definitely a role for public service announcements. We still have a publicly funded broadcasting association in this country and the BBC and ITV have both got a responsibility in that respect. If we spent anyway near as much time promoting saving as we allow for party political broadcasts, that would be a great thing. In fact, if we replace one with the other, that would be an even better thing as far as I’m concerned.
Louis Parperis: We’ve changed people’s behaviours about things like wearing seatbelts.
Is it a case of people still thinking that the state will pick up the tab at the end of the day?
Louis Parperis: Of course they do. And it can’t do. It just can’t do.
So do you think it’s an overreaction from FSA and regulators in regards to what can be said when they’re advising people?
Tobin Murphy-Coles: It’s like all things in life, with any industry sector, there are people that represent the sector really well, there have been people that have let the sector down. And we need a regulator, don’t get me wrong; absolutely. But there has been an overreaction to some of the negative things going over here. Which actually now is to the detriment of some of the good things that the businesses, employers, consultants, IFAs, pension companies are trying to do.
Logan Anderson: In pension legislation terms we’ve had a lot of sledgehammers to crack a lot of nuts. If you ask pensions professionals what’s the one thing that the government can do to help the pensions profession, it’s stop. “Just stop doing what it is you’ve been doing and the tampering that you’ve been doing for so many years!”
Tobin Murphy-Coles: The first thing the regulator should try and avoid is this using a sledgehammer to crack a walnut, kneejerk reaction to something bad happening over here, in the minority, which affects the majority in the way that they’re trying to run the businesses. That’s an immediate change that needs to happen.
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