The nation’s level of savings is woefully inadequate to support a reasonable pensions pay-out, so what can employers do to make their company schemes sexy, not scary? Duncan Brown reports
Stand by for a shock: Pensions! There, I bet that really activated your fight-or-flight instincts. As the government’s 316-page Pensions Bill winds its way through parliament, there’s mounting evidence that we should be scared about pensions. So what’s transformed the somnolent world of actuaries and their formulas into front page headlines for the Chartered Institute of Personnel and Development’s latest survey in the Financial Times and Daily Mail - Early retirement: forget it?
Two factors have blown apart the traditional model of big companies providing an apparently guaranteed defined benefit (DB) pension. First, the stockmarket crash in 2000 sent the value of pension funds plunging, leaving large deficits between their value and the future payment liabilities.
Despite recovering markets, the deficits have remained. That’s down to the second factor, demographics. The good news is we’re living longer. Retire today and you can expect to live another 12.2 years, compared to just four years in 1950. But the downside is we need more savings to pay a pension in this extended retirement.
The total shortfalls of the FTSE 100 companies’ funds are £60bn. The deficits have already contributed to a number of smaller companies going broke, leaving a trail of unpaid suppliers and disappointed pensioners. The new Bill will establish a Pensions Protection Fund but most experts agree the initial £400m funding is inadequate.
And don’t expect the state pension to help close the gap. It’s been declining in real terms for many years as the government tries to shift more of the payment burden onto companies and employees.
In response, most large companies such as British Airways and Sainsbury have closed their defined benefits pensions and introduced defined contribution (DC) plans, which now represent over three-quarters of all UK schemes. There are some excellent DC schemes around but the downside for employees is typically two-fold.
First, companies normally pay less into these schemes, averaging 7% of pay, compared to 14% in DB plans. Second, the employee carries all the risk. So if your shares crash, or your pensions provider goes belly up like Equitable Life, so does your pension.
We should be saving more to compensate but in our ‘spend it like Beckham’ consumer society, the reverse is happening. Nationally there is a £27bn gap between what we need to pay a decent pension and our current level of savings. So how do we address this disaster movie scenario?
At CIPD we’re pushing on three fronts. First we’re supporting the simplification of the complex tax environment for pensions. We also support a simpler and more generous state pension as a safer foundation for occupational schemes.
Second, as well as providing a decent pension scheme, companies should adopt more flexible approaches to retirement and abandon the culture of ageism that is still strong in many workplaces.
Firms such as Asda and B& Q have had great success in addressing staff shortages by encouraging the over-50s to work for and remain with them.
Correspondingly, we need to make the concept of savings attractive to younger employees.
Barclays has had great success with its new Afterwork scheme, which isn’t even called a pension, while medical plan provider HSA will contribute towards employees buying their first house as well as their pension.
Finally, better communication and financial education are essential. Many underestimate the value of their company scheme and companies have been poor at selling them to staff.
Financial services company the Prudential leads the way in this, mirroring its consumer Plan from the Pru campaign with an extensive programme of financial planning for employees. It includes ‘lunch and learn’ briefings, website modelling tools and even a day’s leave to get your finances in order.
Faced with limited take-up among a mainly part-time and female workforce, retailer Gap relaunched its stakeholder pension with an extensive communications programme. Participation rates have tripled in under a year and for benefits manager Sue Hayes, innovation and strong alignment with the Gap brand were critical.
So there you have it, pensions should be sexy, not scary.
n Duncan Brown is assistant director general, Chartered Institute of Personnel and Development
Stand by for a shock: Pensions! There, I bet that really activated your fight-or-flight instincts. As the government’s 316-page Pensions Bill winds its way through parliament, there’s mounting evidence that we should be scared about pensions. So what’s transformed the somnolent world of actuaries and their formulas into front page headlines for the Chartered Institute of Personnel and Development’s latest survey in the Financial Times and Daily Mail - Early retirement: forget it?
Two factors have blown apart the traditional model of big companies providing an apparently guaranteed defined benefit (DB) pension. First, the stockmarket crash in 2000 sent the value of pension funds plunging, leaving large deficits between their value and the future payment liabilities.
Despite recovering markets, the deficits have remained. That’s down to the second factor, demographics. The good news is we’re living longer. Retire today and you can expect to live another 12.2 years, compared to just four years in 1950. But the downside is we need more savings to pay a pension in this extended retirement.
The total shortfalls of the FTSE 100 companies’ funds are £60bn. The deficits have already contributed to a number of smaller companies going broke, leaving a trail of unpaid suppliers and disappointed pensioners. The new Bill will establish a Pensions Protection Fund but most experts agree the initial £400m funding is inadequate.
And don’t expect the state pension to help close the gap. It’s been declining in real terms for many years as the government tries to shift more of the payment burden onto companies and employees.
In response, most large companies such as British Airways and Sainsbury have closed their defined benefits pensions and introduced defined contribution (DC) plans, which now represent over three-quarters of all UK schemes. There are some excellent DC schemes around but the downside for employees is typically two-fold.
First, companies normally pay less into these schemes, averaging 7% of pay, compared to 14% in DB plans. Second, the employee carries all the risk. So if your shares crash, or your pensions provider goes belly up like Equitable Life, so does your pension.
We should be saving more to compensate but in our ‘spend it like Beckham’ consumer society, the reverse is happening. Nationally there is a £27bn gap between what we need to pay a decent pension and our current level of savings. So how do we address this disaster movie scenario?
At CIPD we’re pushing on three fronts. First we’re supporting the simplification of the complex tax environment for pensions. We also support a simpler and more generous state pension as a safer foundation for occupational schemes.
Second, as well as providing a decent pension scheme, companies should adopt more flexible approaches to retirement and abandon the culture of ageism that is still strong in many workplaces.
Firms such as Asda and B& Q have had great success in addressing staff shortages by encouraging the over-50s to work for and remain with them.
Correspondingly, we need to make the concept of savings attractive to younger employees.
Barclays has had great success with its new Afterwork scheme, which isn’t even called a pension, while medical plan provider HSA will contribute towards employees buying their first house as well as their pension.
Finally, better communication and financial education are essential. Many underestimate the value of their company scheme and companies have been poor at selling them to staff.
Financial services company the Prudential leads the way in this, mirroring its consumer Plan from the Pru campaign with an extensive programme of financial planning for employees. It includes ‘lunch and learn’ briefings, website modelling tools and even a day’s leave to get your finances in order.
Faced with limited take-up among a mainly part-time and female workforce, retailer Gap relaunched its stakeholder pension with an extensive communications programme. Participation rates have tripled in under a year and for benefits manager Sue Hayes, innovation and strong alignment with the Gap brand were critical.
So there you have it, pensions should be sexy, not scary.
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