Professional Pensions reported my concerns about the promotion of defined benefit schemes to 3rd sector employers and my view that any such promotion which failed to ensure that the employer fully understood the attendant risks and uncertainties, was irresponsible and totally inappropriate. This elicited some interesting responses and I wanted to thank everyone for their comments on this important issue. There did seem to be a bit of confusion however, which I wanted to clear up.
My comments are clearly focused on DB provision in the third sector. Stephen Nichols, the Chief Executive of the Pensions Trust, was given a 2 page platform and a video to share his views on “Saving DB” and I thought it completely fair and balanced of PP to carry an alternative view and I thank them for that. Other senior staff within TPT have espoused similar views recently around DB so it wasn’t unreasonable to assume it was something of a ‘house view.’ The Trust is a highly regarded and respected organisation marketing primarily defined benefit pension scheme services to third sector employers and I was concerned that some of these employers may accept such a suggestion as being right for them and I wanted to ensure that they were totally aware of the risks involved.
In my experience of advising 3rd sector organisations they are ill-equipped to deal with defined benefit pension arrangements and certainly with ‘multi-employer’ DB arrangements where there is a supplementary risk that the strong will be required to pay for the weak as well as for themselves. The funding position of TPT schemes is not unique, you only have to consider schemes like PNPF and MNOPF to name but two, but their target market is. One respondent accused me of having a binary view and perhaps I do – DB Schemes should be left to organisations who can afford the contributions now and in the future and can deal with the volatility of liabilities and costs. Is anyone seriously contesting that view?
There is an unfortunate legacy of pension debt in the sector and I for one would not want to see it increased. It cannot be in anyone’s interest for employers to be building up pension liabilities which dwarf the value of their organisation and which they have little, if any, chance of ever being able to afford. Pension debt is being cited as one of the major issues holding back the sector.
It’s all very well to encourage people to participate with attractive initial contributions but can they afford it when contributions rise or if their circumstances change in the future. I love the car analogy in a couple of comments. The problem is that people have been sold a ‘Bristol Fighter T’ on the promise that it will cost the same as a Mini and then watched the costs inexorably rise with limited room to manoeuvre in terms of an exit strategy.
There needs to be a focus within the sector on dealing with the DB debt legacy and recognising where it is inappropriate for organisations either to begin to build up DB liabilities or, indeed, to continue to do so. This issue needs to be addressed. There are encouraging signs from the local government sector, for example, that the problem is finally being recognised. As a strong employer, the local authority and by default council tax payers, should not have to act as a lender of last resort to small organisations with a legacy DB debt. Local government schemes have taken steps to make it more difficult for such organisations to participate and implemented tiered contribution structures reflecting risk. They have also made sure that those who do sign up for their schemes are aware of the liabilities they are accruing. Indeed, they have gone further and are taking steps to give those who recognise the problem and take responsible steps to try to address it reasonable funding and exit options. These are certainly steps which TPT could valuably learn from.
To clarify a couple of other points. I don’t believe I promoted a DC only future or indeed suggested that I considered NEST to be the answer. The vast majority of organisations I deal with would be very happy to provide contributions at an attractive level up to those provided by DB to provide their staff with valuable retirement benefits provided they are not inherently volatile.
Somewhat ironically given some of the comments neither I nor indeed my firm, provide defined contribution services for clients but purely advise on the defined benefit legacy. That however does not mean I am unaware of the issues and consequently I’m unable to accept Stephen’s assertions that DB is simpler and cheaper and can be provided for the same money and risk as DC. Perhaps I am not quite as conflicted in terms of future pension provision as others involved in the debate.
If one employer who is ill-suited to DB provision picks up this discussion and makes an alternative more appropriate selection then I can ask for no more.
PS: Thanks for the suggestion re the Avatar.