Slash and Burn

Neil Copeland

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In another of many measured contributions, from various shades of opinion, to the pensions debate, Professional Pensions reports that TUC delegates have heard that trustees must take a stand against “slash and burn” employers using the recession as an “excuse” to close final salary pension schemes.

This betrays a misunderstanding of three different things simultaneously, which is really some achievement for a single sentence.

Firstly, the move away from final salary was well established and had advanced apace, particularly in the SME sector, long before the recession was a twinkle in Gordon Brown’s eyes. I have not come across an employer which lightly decided that it should close its final salary scheme without it evaluating all the options available to it and coming to fully understand the risks associated with such schemes. Many of the employers seeking to close schemes now are those who have persevered, occasionally against the advice of their advisers, in the hope that something, some meaningful legislative deregulation or the FTSE moving to 9,000, would solve the pension problems they face. The recession is not an “excuse”, it has merely underscored that there are no knights in shining armour riding to anyone’s rescue, and forced employers to properly address the issues. The Government (and unions) will also have to recognise that the same factors render Public Sector pensions at current levels unsustainable.

Secondly, if you enter “slash and burn” into Wikipedia the first thing you see is a warning to say that it is “Not to be confused with scorched earth.” Although corrupted by later industrial scale practices, slash and burn, in its original sense and as originally practiced by small groups of people in large forest areas, was a fairly ecologically sound basis for agriculture. Scorched earth on the other hand refers to the deliberate laying waste of an area by one party to deny the benefit of its resources to another. I would argue that this is an equally inappropriate metaphor in the circumstances but it may be closer to what the speaker was trying to convey.

Thirdly, it is not, nor has it ever been, the responsibility of the trustees to negotiate future benefits on behalf of the membership – if anything that’s the unions’ job. Trustees need to administer the Scheme in accordance with the trust deed and rules and in that context look after the beneficiaries interest. It has been established, for example, in relation to scheme surpluses (remember those?) that sponsoring employers retain a beneficial interest in schemes and trustees cannot simply disregard that legitimate interest. On occasion trustees will find themselves with some element of power or leverage where an Employer is seeking to close a final salary scheme. It is legitimate for trustees to use this wisely to act in members interests in the context of accrued benefits, but not, in my opinion, to thwart a legitimate business interest of the Employer to manage future pension costs.

This should not be taken as a simple argument in favour of the Company or the Employer, and Employers need to think carefully about the level of any replacement benefits provided – pure defined contribution schemes are not the only alternative.

However I was prompted to write this blog first and foremost because I don’t think its helpful for the debate on pensions, which is of fundamental importance to this country’s future, to be conducted with megaphones and name-calling from any of the parties.

As a pension professional I want to be associated with an industry that educates people to give them a realistic perspective on what they need to do to achieve financial security in their retirement and provides a framework that allows them to achieve that security. Currently we are failing to do this – I speak to members of both final salary and DC schemes regularly and a pension arrangement as a savings vehicle is marginally less trusted than MPs.

The bottom line is that the current pension system in the UK is unsustainable, both in the sense of affordability of final salary schemes on one hand and the low level of DC pension saving on the other.  If we continue to ignore this reality we will only see further dissatisfaction with and distrust of the system emerge.

We need to have a serious debate about how we come up with an alternative system that delivers people a reasonable income in retirement. It may be unpalatable for some to hear, but this will inevitably involve individuals assuming greater responsibility for their retirement saving. The reality is that people are going to have to save more, or work longer, or get by on less or some combination of these elements.

There is a role in shaping the future pension regime for the Government, employers and their advisers and employees (and by extension, the unions as representatives of employees) and we need stop pussyfooting around the issues and get on with coming up with a solution.

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.