Good pensions or a pay rise? A response to the ILC-UK
If it wasn’t for companies meeting their obligations to fund defined benefit (DB) pension schemes, average wages would be £1,473 higher, claimed a think tank this morning.
It is a compelling argument for many coming after a prolonged period of stagnant wage growth.
It is also reminiscent of the sort of thing seen on the side of a campaign bus. And here are five reasons such a claim should be treated with similar scepticism.
- If filling in shortfalls in DB schemes was limiting employers’ ability to increase pay, companies without DB schemes would be offering higher wages for similar work. There is no evidence that this is happening.
- Linked to this, the report’s authors at the International Longevity Centre-UK don’t explain how cuts to DB pensions would lead to this liberated cash going into workers’ wallets (or their defined contribution schemes), rather than, say further bolstering the record surpluses being generated by corporate Britain..
- The analysis provided ignores questions of pension fund accounting and valuations. A strong case can be made that gilt-based approaches are distorting pension accounting and grossly inflating scheme costs. Gilt yields, driven down by quantitative easing and other factors, are an ineffective proxy for investment returns.
- The ILC’s answer to the problem it claims to identified is to “devise solutions that move away from simply securing full member benefits and towards those that build in a recognition for the wider societal and economic challenges associated with continued DB pension deficits”. This is a rather obtuse way of saying “cut member benefits”. If there are cuts to be made, the analysis doesn’t explain why members should pay, rather than say the shareholders of the companies that made the promise in the first place.
- And, the most important issue in my view, it completely ignores the key challenge ahead of us: how to fund retirement. We know that not enough money is going into pensions. So why cut the very bit of the pensions system that is doing a reasonable and, compared to most DC schemes, efficient, job of providing incomes in old age?
The future of DB pensions is going to be the subject of much fierce debate we await the Government’s Green Paper in the New Year. Indeed, it will a discussion of DB schemes will be a key part of the TUC’s forthcoming free annual pensions conference.
And of course business opportunities abound in a sector that boasts £1 trillion of assets.
The global law firm paying for the ILC report cites the rise of “gifted structurers” to resolve DB schemes’ issues. Presumably one can pay it to find out what this actually means.
That is not to say that reforms shouldn’t be made.
- The standard industry way of valuing DB pension schemes increasingly make little sense, certainly for those open to accrual. And it leads to too many schemes locking in negative returns by investing in government bonds. Schemes should be strongly encouraged to use realistic assessments of future returns and invest in appropriate return-seeking assets for the long-term.
- There is potentially a case for some form of consolidation in a sector where there are 6,000 schemes each purchasing services and negotiating with fund managers.
- And we should be thinking imaginatively about the future structure of benefits (in DC as well as DB) to give all generations the best chance of amassing a decent income for retirement.
But just as few now swallow claims made on the side of campaign buses, don’t be fooled into thinking that any of us are going to get a £1,500 pay rise by taking the axe to DB pensions.