Making Sense of Pensions

David Davison

This article was originally published in Lexis Nexis on 4th April 2019

Pensions analysis: David Davison, director and owner of Spence & Partners who leads the public sector, charities and not-for-profit practice and heads a team advising third sector bodies on all aspects of pension provision, discusses the recent government consultation which intends to ensure that exit payments paid to public sector employees are ‘value for money for the taxpayer’.

Original news

HM Treasury opens consultation on restricting exit payments for public sector workers, LNB News 10/04/2019 90

HM Treasury has opened a consultation outlining how the government will introduce a £95,000 cap on exit payments for public sector workers. The policy will see UK civil service, local government, police forces, schools and the NHS taking part in the first stage of implementation. The consultation sets out proposed draft regulations, schedule to the regulations, accompanying guidance and directions. The deadline for responses is 11:59pm on 3 July 2019.

What is the background to HM Treasury’s consultation on draft regulations restricting exit payments in the public sector published on 10 April 2019?

There has been government concern for some time about the level of severance packages in the public sector. This issue dates back to May 2015, with the government announcing it would bring forward proposals to end six figure pay-outs, then running an initial consultation with proposals in February 2016 and implementing changes in the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) and amending in the Enterprise Act 2016.

SBEEA 2015 required secondary legislation which had a first reading in the House of Commons in September 2017, with them now consulting on the detail based upon the proposals issued on 10 April 2019. It’s been pretty slow progress, but I suppose no-one should be that surprised by the contents. When this was looked at initially, there seemed to be some high profile severances and a real concern about senior staff in the public service exiting for large severances and then returning to another similar job a short time later.

The proposals follow research they’d carried out which suggested that more than 1,600 highly paid workers received payments of more than £100,000 in 2016/17 costing a total of £198m. They estimate that the total cost of exit payments across the public sector in 2016/17 were £1.2bn. So, the proposed limit will impact less than 17% of total payments and any saving likely to be materially less than that as still some pay-out will be made. The focus is going to be very much limiting large payments at the top-end and not those for the vast majority.

What are the key proposals for change and why are they being implemented now? Are there any specific exclusions or exemptions under the proposals?

The proposals would implement a cap on the value of redundancy lump sums and pension top-up payments to £95,000 in total. Those organisations impacted are specified in the proposals, but it is the ultimate aim that the legislation will apply to all public sector employers at a future date so effectively we have a two-stage roll-out.

Payments made by devolved authorities are exempt, as are payments from secret intelligence service, the security service, the government communications HQ and the armed forces given their unique requirements. Payments from fire and rescue authorities are also proposed to be exempt as they do not increase the actuarial value of the pension payable.

As a general rule, accrued pension entitlements are exempt as they do not incur an additional cost to the public purse however payments which do involve an additional employer cost (such as ‘strain costs’ payable on redundancy) would be included. Other exemptions include death-in-service benefits, incapacity benefits, a payment in lieu of contractual leave not taken, payment in lieu of notice or any payment made by court order or a tribunal.

The proposals provide a standard legal underpin, however they do not prevent employers from applying alternatives.

How would the introduction of the proposals impact on public sector employees and employers?

It is the employer’s responsibility to ensure that a payment is not made in excess of the cap. This will place an additional administrative burden on employers. Clearly for employers it would reduce the overall cost of severance packages. It is also likely to make planning for these costs more certain. For employers there will be a requirement to consolidate all payments to ensure that the cap isn’t breached. This will mean ensuring that ‘strain costs’ are identified early in the process to allow these to be incorporated.

Employee payments will at the higher end be lower which may influence decisions about exiting as it may make them less attractive or indeed unaffordable. This may also make the option of restructuring senior roles more difficult for employers possibly trapping senior employees in roles they are not wholly committed to. That said it may promote greater transferability between roles.

There is some guidance on the order of payments in Section 6 of the draft Restriction of Public Sector Exit Payments Regulations 2019. The legislation also proposes some flexibility in the implementation of the cap. Where there is flexibility—such as the priority between cash payments and pension strain costs—these will have to be clearly communicated to the employee to allow the required decisions to be taken. It’s likely that engagement will be required at a much earlier stage in the process to facilitate this.

One major concern with the proposals is that they would create a two-tier system in the public sector between employees who are in funded pension schemes and those who are in unfunded schemes. In funded schemes the ‘strain cost’ for early retirement would be deducted from the capped figure or benefits reduced. For those in unfunded schemes no equivalent mechanism exists to recoup redundancy/early retirement costs even though the same equivalent cost would be experienced by the Exchequer. This could mean that employees (and in some cases employers) in unfunded schemes benefit from a much better deal than their counterparts in funded schemes.

Employers will also have to be very careful in the implementation period not to take decisions which could result in costs materially higher than the level of the cap when it is imposed.

What is the timetable for implementation of the changes? What are HM Treasury’s next steps?

The consultation will last for 12 weeks to 3 July 2019. Responses to the consultation may be published. Post this, the draft Regulations may be implemented as proposed or revised.

Interviewed by Varsha Patel.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Link to original article –
https://www.lexisnexis.com/uk/lexispsl/localgovernment/document/412012/8V8N-WKK2-8T41-D1GT-00000-00/Capping-exit-payments-in-the-public-sector%E2%80%94a-review-of-the-draft-regulations-for-consultation/31544

David Davison

We have analysed the 2017 Fund actuarial valuations and carried out some analysis of the employer membership in Scottish LGPS to see how this is distributed. From this we can identify what issues Funds and employers might face.

There are 11 Scottish Funds with the share of overall employers shown below.

The numbers are dominated by Strathclyde Pension Fund, Lothian Pension Fund and North East Pension Fund who account for two thirds of the employers with the other eight Funds making up only one third. Borders, Dumfries & Galloway and Shetland all account for only around 2% each.

We identified a total of 544 employers and have classified them in to the six broad Groups as shown below.

Public bodies, such as Councils, Police and Fire Service, account for around 11% of the total number of employers though these bodies will account for the vast majority of the Funds liabilities.

Leisure organisations will tend to have been formed from outsourced agreements from local authorities and will be run as autonomous organisations.  Often this switch however has left these organisations without any protection should they wish to revise their membership of the schemes and has left them saddled them with huge inherited legacy liabilities from the Councils which they do not have the underlying asset base to support. These organisations therefore are effectively trapped in schemes and leaving them without the level of autonomy they believed they had.

Similarly schools and colleges will have evolved out of public entities or be private schools with public sector links. Participation in LGPS tends to be for non teaching staff. Again these organisations will have little if any financial protection and will find any changes to their LGPS membership complex and expensive to achieve. These organisations are also likely to be facing additional financial pressures from rising costs in the teachers pension scheme as well as some having to deal with membership of the University Superannuation Scheme (‘USS’) all putting a strain on already hard pressed budgets.

Private companies will tend to participate as a result of providing out-sourced public sector services and the requirement to maintain equivalent benefits for contracted staff under Fair Deal. Some of these organisations will be protected by Council guarantees or ‘pass through’ arrangements but many will not, often leaving their shareholders oblivious to the underlying risks they are running.

That leaves the vast majority of employers (around 360) as either charities, who account for nearly 60% of the employer membership, or social housing organisations who account for about 7%, so nearly two thirds in total. In liability terms they will probably account for considerably less than 10% of overall fund liabilities. Some of these bodies may have exited the Fund since the 2017 valuation was carried out.

Some of these charities may also be undertaking public sector contracts and therefore have some form of guarantee or transferee admission body status but the vast majority will not.

The key SPPA findings were that:-

  • There were 530 employers with at least one active member. Of these 422 were admission bodies (covering both transferee and community admission bodies) of which 223 had no guarantor and so were at some point likely to be liable for a cessation payment. Of these 102 had 5 or fewer members where a cessation payment could be deemed to be payable in the short term.
  • Worryingly of the 102, 60 remain open to new members and are therefore building further liabilities which suggests either a lack of understanding of their position or a position forced upon them as a result of the Scottish LGPS Regulations.
  • Of the 121 with no guarantor and more than 5 members 94 remained open to new members.
  • There are 41 employers at greatest risk as they have fewer than 5 members and are closed to new members which mean that a cessation is imminent.
  • The cessation deficit associated with the ‘at risk’ group of 41 was estimated to be in the region of £12m-£15m (i.e. and average of around £300,000 per body). Two LGPS Funds looked at the financial position in their schemes which showed that for organisations with 5 or less members the funding position moved from around £1.93m in surplus on an on-going basis to around £9.4m deficit on a cessation basis. This very much resonates with my experience.
  • The total liabilities for the 223 admitted bodies with no guarantor were in excess of £350m and the cessation deficit could be in excess of £150m.
  • The cessation position could be materially worse now given falls in gilts yields since 2014 which highlights the issue with the cessation basis being adopted.

Based on these numbers I would expect that the position in England and Wales would be 8-10 times greater, so these issues could affect in the region of 2000 other charities and account for deficits approaching £80-£100m. A material proportion of this will relate to liabilities transitioned surreptitiously from local authority to unsuspecting charities.

Changes to Scottish LGPS Regulations in 2018 looked to provide additional flexibility to look to manage these issues however they haven’t been widely adopted by the Funds.

More research needs to be carried out to understand the pension position fully in relation to the covenant position of the organisations concerned and to look to develop solutions, and potentially further update Regulation, to allow this issue to be effectively managed.

Angela Burns

This guide is intended to be a useful reference for companies preparing their 31 March 2019 pensions accounting disclosures, whether under FRS 102 or IAS 19.

In this guide, we will review the changes in the investment markets over the last 12 months and consider the impact these will have had on a typical pension scheme. We will also review recent developments in the area of pensions accounting, highlighting issues that you should be aware of.

With the wealth of corporate advisory experience available at Spence, we are well placed to provide you with guidance in how to best manage your pension scheme liabilities.

The implications of the recent developments should be considered to help you avoid any surprises. Spence can help guide companies through these complexities and have a proven track record in navigating to the best outcomes for our clients.

We would be happy to discuss the options available to you in reaction to the market trends discussed above, including:

  • How to lock in asset gains;
  • Decrease future risk;
  • Reduce funding level volatility.

To discuss these topics further, please contact Spence through your usual contact or connect with our Corporate Advisory practice associate, Angela Burns, at angela_burns@spenceandpartners.co.uk  or by telephone on 0141 331 9984.

David Davison

On the 8th May the Ministry of Housing, Communities & Local Government issued a policy consultation entitled “Local Government Pension Scheme: Changes to the Local Valuation Cycle and the Management of Employer Risk.” This comes following the publication in September of the “Tier 3 employers in the LGPS” research findings. The consultation closes on the 31 July 2019.

The first proposal is to change the actuarial valuation cycle in LGPS, from every 3 years to every 4 years, to coincide with the 4 yearly valuations of LGPS as a whole. I do have some concerns that for admitted bodies in the Schemes this will mean that they receive less information and ultimately the information provided will have to have a much longer shelf life. I suspect this is driven more by the inefficiencies in administration and a drive for cost savings than it is for any drive for valuation consistency.

I think to make this change work Schemes should be supplying annual updates on the funding and cessation position (perhaps linked to the provision of FRS102 information) which would allow organisations to be better informed about their position and options.

Of greater importance to charity participants are a series of proposals primarily aimed at looking to help employers better manage exits from the Schemes.

The document recognises that “for some employers a significant issue is the cost of exiting the scheme which can be prohibitive.” The consultation seeks views on two alternative approaches:-

  • To introduce a ‘deferred employer’ status that would allow funds to defer the triggering of an exit payment for certain employers who have a sufficiently strong covenant. Whilst this arrangement remains in place, deferred employers would continue to pay contributions to the fund on an on-going basis. This is looking to broadly replicate the ‘deferred debt arrangements’ (‘DDA’) brought in by DWP to deal with Section 75 debts in multi-employer schemes and the suspension arrangements implemented in Scottish LGPS in 2018;
  • To allow an exit payment calculated on a full buyout basis to be recovered flexibly – i.e. over a period of time providing this is deemed to be in the interests of the Fund and other employers. This is designed to put in to regulation a framework to provide flexibilities on a more formal and consistent basis to those being utilised ‘informally’ by some funds via alternative arrangements.

Whilst I welcome the sentiment and the objective to formalise any additional flexibilities offered the consultation proposals stop well short of fully recognising the issues and finding a full range of workable solutions to deal with them.

  • The DDA legislation and the changes to the cessation position in LGPS in Scotland brought in in 2018 have both been damp squibs with schemes choosing to ignore the changes and to continue to plough their own furrow. The fundamental issue seems to be that schemes are using any request to use the new regulations as an opportunity to re-negotiate security arrangements with the participant. This is hugely short-sighted as it ignores the lack of security on the benefits already built up and that it cannot be in the interests of the organisation, or indeed the other organisations participating, to build further liabilities. This stance in most cases therefore forces organisations to stay in the Scheme which is exactly the result the changes were looking to avoid! The proposals in this Consultation just seem re-inforce this issue referring to employers who are “sufficiently strong” being the only ones who avail of the proposed funding flexibilities – exactly the employers who can probably afford to exit or even potentially continue in the Scheme;
  • The proposals need to consider what options are available for less “sufficiently strong” employers. It cannot be sensible to force employers in to insolvency as a result of their pension liabilities but instead find a better way to manage these. In the interests of the impacted employer and others in the Scheme it would seem more productive to identify methods where the fund can obtain the maximum possible amount, even if this amount is less than the full cessation position. Some LGPS have already pioneered work in this area and the proposed changes are well behind the curve in terms of effective solutions;
  • The gilts based cessation methodology is flawed. Over the past 10 years gilt yields have fallen from over 5% to well below 2% which means that exiting employers are subjected to something of a lottery in exit terms. Currently high cessation values based on low gilt yields make exits less affordable keeping employers tied to the scheme – again counter-productive. Funds feel their hands are tied in investment terms forcing them to either invest very long term liabilities in poorly performing gilt assets or some funds remaining invested in the same way effectively just taking the cross subsidy benefit from their charity participant to help fund public sector liabilities. A more equitable system could be to look at the rolling average gilt value over a period or based upon the expected local authority borrowing costs;
  • There continues to be no recognition of the issue of legacy liabilities within LGPS. It is wholly inequitable for public sector bodies to expect admitted bodies in their Funds, often charities, to cross subsidise the public entity for benefits built up by staff while working for them. These liabilities should continue to be held by the public body in the same way as they were pre a transfer and new employers should be fully protected from these. Benefits reverting back to a prior employer for service linked to that employer just means that they continue to be dealt with on an on-going’ valuation basis (as they were initially) and not converted to a cessation basis. This is a solution which is also likely to make exits more affordable.
  • The suggestion that the steps proposed are linked to protecting the remaining employers in the Funds and this is repeated here. This whole issue of residual risk has been over-egged. The risk is already there and rising – what is needed is an affordable way to minimise the associated risk with the accrued liability and limit any future accrual. How can it be sensible to have 2 employers where one has one active member and one has no active members and yet they are both treated in vastly different ways.

The proposals in this consultation paper are a hugely disappointing response to the issues and in my view provide a wholly inadequate range of options to address the major issues faced. You’d have thought having sat on its hands over this issue for such a long time that the response would have been more comprehensive and considered.

I will be preparing a more detailed response to the consultation which I will share in a future Bulletin. I would also suggest that if you are a charity affected by these issues that you also respond to the Consultation.

Matt Masters

Have I Got EUs for EU

When a single issue starts to dominate headlines, it can become a little tedious. Whether we like it or not, Brexit will continue to be front page news for a while longer.

However, it’s important we keep Brexit in perspective. While Brexit may lead to a period of disruption, a number of economists believe that, in the long run, it’s unlikely to make a significant difference to GDP growth. For global investors there are bigger issues:

  • the price of commodities;
  • weakness in emerging market economies;
  • concerns over the future strength of the Chinese economy;
  • President Trump’s unpredictability;
  • the USA trade war with China;
  • and rising interest rates.

So, while turbulence, be it the result of Brexit (and there is near unanimity in a recent Centre for Macroeconomics survey that the Brexit question will increase financial volatility) or other factors, can be unnerving, it also offers opportunities. The key is to keep calm and remember that volatility is part and parcel of investing over the long term and a normal function of healthy markets. The moral of the tortoise and the hare story is that you can be more successful by being slow and steady than quick and careless.

Market volatility has undoubtedly caught out some over the years, causing them to panic and sell, losing money in the process. However, investors who have been able to stay the course are likely to reap the rewards. By way of illustration, over the past 30 years or so (incorporating Black Monday, Black Wednesday, the Dot.Com crash, Lehman’s collapse, the Global Financial Crisis and the like) £1,000 would have grown to over £18,000 if invested in the FTSE All-Share Index. Indeed, adding to existing positions at attractive valuations has been a cornerstone of Warren Buffett’s success.

Where does that leave trustees and sponsoring employers of DB pension schemes?

  • Factor Brexit in as a managed risk, keep an eye on covenant and be mindful of members with EU bank accounts.
  • When it comes to investing, don’t panic. Brexit is a known unknown. This means that it’s impossible to accurately predict how various scenarios will ultimately unfold. As a result, it would be prudent to consider exposure to a variety of economies and asset classes; as well as ensuring there is sufficient available cash to meet (potentially unpredictable) benefit outflows.
Andrew Kerrin

1,193. The number of world ranking places that Tiger Woods has climbed in just over a year. A comeback to rank amidst the finest sporting comebacks. A story of resilience. A lesson in positivity triumphing over adversity.

Normally when I sit down to write an introduction to Spence’s latest Quarterly Update I struggle to find a current event that may have some (often tenuous) link to the topics in the report, or that are ripe for making (even more tenuous) puns. Well, not this quarter!

All week the front pages of my usual news feeds have had images of this sporting legend draped in his new (but fifth) green jacket. Like many of you reading this, I had given up hope of seeing the halcyon days of Woods’ return to golf. Yet, from the nadir of a personal life implosion, numerous surgeries and a world ranking of 1,199, hope and positivity were still retained by Tiger, if not by the rest of us. Now, the news bulletins are awash with congratulations from sport stars, world leaders and people from all across the globe, hailing the return of this thrilling force of nature. Pessimistic talk of an irreversible slide has turned to optimistic predictions of more major championships to come.

The first quarter of 2019 has seen a different type of slide for DB pension funds, with scheme funding levels falling considerably towards the end of March, driven by falling gilt yields. UK pension schemes were once at the top of the world rankings too, but have seen their standing slip in recent years. Yet in the midst of these chastening times there are positives to be had. Like the reaction of Tiger Woods, there is resilience. There is a desire to learn and prepare, to come back stronger, healthier and more secure.

This Quarterly Report discusses progress made to protect members from pension scams, with the new cold calling ban. There are features on the Regulator’s new guidance on scheme data and how to better value DB schemes going forward. We’ve also included a summary of the government’s approval of Collective Defined Contribution schemes, as a means for members’ benefits to be better protected as a result of pooling contributions and risk together.

No matter how disheartening an image may be – an icon of sport in ruins, or the increasing size of a scheme deficit – there are always actions we can take to find positives and come back stronger. Hopefully our Quarterly Report assists in that effort and helps schemes get back into the swing of things (I couldn’t resist at least one golf pun!).

Click on image above or this link to download.

Brendan McLean

All major equity markets gave a positive return over the quarter. This was mainly driven by the Federal Reserve (Fed) confirming it would not increase interest rates (as previously indicated) due to declining economic growth and easing of concerns over the China/US trade dispute.

UK equities rallied over the quarter in line with global equities. Investor sentiment improved as it became clear that there was no majority in the House of Commons for a ‘no-deal’ Brexit. A number of domestically-focused equities increased following the delay to Brexit beyond March 2019 as hopes that a disorderly exit from the EU could be avoided. Sterling increased versus the Euro and US dollar. UK long-term inflation expectations were unchanged over the quarter.

US equities were the best performing region as investors responded positively to the Fed stating it will not increase interest rates. Emerging markets equities performed well over the quarter led by China. The US administration’s decision to suspended tariff hikes on $200 billion of Chinese goods, together with ongoing government support for the Chinese domestic economy, was all supportive.

The price of Brent crude oil increased by 27% over the quarter as OPEC followed through on promises to cut production.

Corporate bonds performed well due to the Fed signalling it will not raise interest rates and that quantitative tightening will end in September.

UK gilt yields decreased over the quarter as investors flocked to safety due to fears of slowing growth. All else being equal, this acts to increase the value placed on pension schemes liabilities.

David Davison

This is a challenging time for LGPS. Funding pressures, consolidation, Tier 3 issues and investment pooling are all high on the agenda. When it comes to taking effective decisions and shaping the future direction of LGPS there needs to be confidence that these issues are being addressed independently and without conflicts of interest. However is this really the case?

LGPS are run as parts of a local authority and the key staff are Council employees. Usually the individual ultimately responsible for the delivery of scheme services is a senior executive or finance officer in the Council. Can these individuals discharge their duties to the scheme independently of their responsibilities to the Council and can Pension Managers do likewise when their ultimate line manager holds this position? How independent can these key people ultimately be when they are beholding to councillors in the local authority for agreeing budgeting and staffing levels? Would decisions in any way be swayed by these day to day concerns rather than the complete impartiality required on any decision they are taking?

Conflicts of interest are obvious so the key question must therefore be how well are they managed? The 7 principles in public life (‘the Nolan Principles’) require selflessness, integrity, objectivity, accountability, openness, honesty and leadership.

The Pension Regulator’s guidance on conflicts of interest in public service schemes (such as LGPS) focuses on potential conflicts of interest as a member of the pension board. Any such member must not have “a financial or other interest which is likely to prejudice a person’s exercise of functions.” It goes on to confirm that “actual conflicts cannot be managed, only potential conflicts.” Wider examples are given where senior staff may be conflicted.

The test is that the scheme manager must be satisfied. 

Conflicts must be managed in 3 stages, namely identifying, monitoring and managing.

In practice however does this really fully address governance concerns. How seriously are Executives taking these conflicts, fully meeting the relevant Nolan principles and codes of conduct?

How might this impact on non Council participants in the Fund?

Information cannot be available to a Pension Fund Head as part of a negotiation and not to a Council FD if both are the same person! How can a Council FD claim to be detached from the policy in a Fund’s Funding Strategy Statement when they are the individual who has signed and issued it!  How can a Fund be expected to robustly pursue a Council guarantee for an employer when it is the Council FD who is required to agree it and provide sign off? And yet from the schemes perspective it should be doing so to protect other employers.

This does not create an environment for challenge, growth and change but one which favours the status quo. There is little or no motivation to change historic practices and to innovate and this reflects the ponderous pace of change in schemes and their inability to reflect their employer and employee needs. This is also reflected in the myriad of local practices which have evolved in schemes over many years which do not bear close scrutiny. Schemes a short geographical distance apart can adopt wildly differing approaches to managing exactly the same issue.

I am not for a moment suggesting that decisions are deliberately being subject to bias but the potential is there for implicit bias, which is exactly what good governance and the necessary checks and balances are there to resolve.

The model operated by Local Pension Partnership covering a number of regions also provides offers some room for optimism as it has implemented the required additional independent governance tier and their approach has resulted in welcome levels of innovation and flexibility.

One of the options considered as part of the review of local government pension schemes in Scotland could provide a blueprint for change. The formation of a single Scottish LGPS operated independently from local authorities, which could be self-financing and run autonomously by a wholly independent board would provide complete independence and additional comfort that the required governance structure is in place and operating efficiently.

But how close are we to getting something like this more consistently? A long way off I suspect. There aren’t really similar discussions to those in Scotland on-going in England, Wales and Northern Ireland, and those in Scotland are some way from implementation. Why would Funds themselves be the turkeys voting for Christmas and push this change agenda earlier? Any impetus really needs to come from central government and have a reasonable timescale imposed if it is not to be subject to local / regional self-interest. Central government need to grasp the nettle here if financial savings are to be made and a more independent and consistent form of governance is to be achieved.

Hugh Nolan

Young Savers

We all have a vague idea about how little young people engage with pensions but figures from the Office of National Statistics (ONS) suggest the problem is worse than most of us thought and is by no means limited to pension saving. Astonishingly, most people aged between 18 and 29 don’t have a single savings account and 6% of them are in debt to the tune of more than £10,000 (even before allowing for student loans).

Slightly over half of 22-29 year olds have no savings whatsoever, with this proportion up to 53% from 41% before the credit crunch. Of those who do have savings, 1 in 10 have less than £100 and 40% have less than £1,000. On the positive side, 1 in 4 have savings in excess of £6,000 and 10% have savings over £10,000. They may well be saving for a deposit on a house, as only 1 in 4 own a house (with 1 in 3 still living with their parents and the rest renting). The number of these young people owning their own home has fallen by a quarter in the last 10 years.

Debt levels look troubling for 22-29 year olds too. The good news is that only 37% of them are in debt at all, compared to 49% a decade ago. More than a quarter of those who are in debt owe more than £6,000 and 1 in 10 owes more than £14,000. Those amounts will seem huge to the 47% of them that earn less than £20,000 per annum.

The problem is naturally worse for 18 to 21 year olds. The median earnings for this group is less than £10,000 per annum and only a quarter of them earn over £15,000 a year. It’s not surprising that 75% of them still live at home with their parents and they have average debts of £2,400.

These figures really bring to life the challenge of getting young people to agree to put aside some of their earnings to save for a pension that they won’t get until 2060 or whenever. The inertia of auto-enrolment is working pretty well but we might need to bring back compulsory membership of pension schemes once the contribution rates become more realistic to provide a decent pension.

My dad once told me how much he had resented the “2 and 6” he was forced to contribute to his pension scheme. Obviously I am too young to understand what “2 and 6” means but I gather it was a reference to some money that wasn’t a huge amount but would have come in handy for a newly qualified teacher with a young family. As he got closer to retirement he realised that it was actually the best thing that had ever happened to him financially as he knew that he wouldn’t starve in retirement and, more importantly, he’d still be able to provide for his wife and children. Perhaps the time is coming when pensions should again be compulsory so that young people will get the same protection in future.

Until then, I remain keen on the idea of getting people auto-enrolled as early as possible on a very low contribution rate, with gradual increases to an adequate rate over a number of years. I also like the idea of keeping the minimum contribution rate lower than the 15% that many commentators recommend. I’d be happier with a required combined rate of 10% (split evenly between employers and their workers) where members can choose to pay AVCs if and when they can afford them, with employers matching those too. That would allow people to concentrate on buying a house or raising young children when they need to while also encouraging them to top up their pension when they have a bit more disposable income later in life.

Hugh Nolan

Fair Pensions for Women

Following International Women’s Day recently, I wondered how fair pensions are to women these days. A survey by the Society of Pension Professionals (SPP) in 2017 found that 49% of us thought that pensions were fair for women, compared to 61% who thought the same for men. Only 7% strongly disagreed that pensions were fair for women. I’m one of the 7%.

Women now have equal Normal Retirement Ages to men and can expect to live longer than men, drawing their State and any other Defined Benefit (DB) pensions for longer. The recent investigations into GMP equalisation has highlighted that it’s very hard to predict whether men or women are better off because of the remaining inequality, with the average difference being less than 1%. I can understand why people might imagine that pensions are fair between men and women. They’re still wrong though!

The main reason why pensions aren’t fair is that pay before retirement isn’t fair to start with. In 2012, the median earnings for women working full-time was £23,100 pa, some way below the equivalent figure of £28,700 pa for men. When gender pay gap reporting was introduced in 2017, 90% of women covered by the survey were working for employers who paid them less than men and in most sectors, the gap was over 10%. This might be improving slightly as early indications from the 2018 reporting suggested that 50% of companies narrowed the gap over that year, although 40% widened it.

The Office of National Statistics (ONS) says that women are paid 17.9% less per hour than men on average. It’s even worse in Germany (21%) and the US (22%). In Finland, women retiring in 2017 got pensions 27% lower than men, even though twice as many women as men got a top up national pension for those with low/no private pension savings. A DWP survey in 2016/17 found that female retirees in the UK got 40% less than men, leaving them about £7,000 pa worse off.

So it’s clearly not just the gender pay gap that is feeding through to unfair pensions for women. Women are predominantly relied on for child care with fewer than 30% of men taking more than 2 weeks parental leave, three times as many women working part time as men (5.9m compared to 2.1m in 2013) and women also typically retiring two years earlier, often because they can’t continue in their jobs rather than out of choice. On top of that, 1 in 5 women aged 45 to 59 is a carer for someone else. There are 2,700,000 working women who earn less than the £10,000 pa needed to qualify for auto-enrolment. You probably won’t be surprised to hear that more women choose caring occupations rather than those that are most lucrative.

Research from Aegon suggest that these factors combine to leave women with average pension savings of £56,000 by age 50, exactly half of the corresponding figure for men. 15% of women don’t pay into any pension scheme at all (11% for men) and only 4% of women have £300,000 or more in pension savings, compared to 15% of men. According to an Aon survey in 2018, more women than men contribute less than 5% of their pay to pensions (30% vs 40%) and more women than men worry about running out of money after retiring (64% vs 50%). 1 in 3 women admit they are unsure of their exact pension savings and only 1 in 5 men say the same, though personally I suspect that might be largely due to bravado.

As if all that wasn’t bad enough, the advantage that women have been able to draw their State Pension earlier than men has also been taken away from them. The Pensions Act 1995 set a timetable to equalise State Pension Age but the austerity agenda led to an acceleration in 2011 with 2.6 million women having their retirement plans thrown into confusion. 873 of these women are known to have self-harmed due to the stress and hardship of these reforms and 70 say they have been so badly affected that they attempted suicide.

Does that sound fair to you?

Page 2 of 6212345...102030...Last »