A greener shade of vague: where are defined benefit pensions headed?
If dogs resemble their owners, do government documents resemble their Ministers?
Since entering office less than a year ago Pensions Minister Richard Harrington has appeared to be non-dogmatic, willing to engage with a wide range of voices and generally distrusting of pensions jargon.
His speech to the TUC Pensions Conference was much about his willingness to listen and little about a grand vision for pensions.
Yesterday’s long-awaited (they talk of little else on my morning train) Green Paper on defined benefit (DB) pensions has much the same feel, as if it entered the room in a comfortable pair of slip-on shoes.
It is moderate in tone. It strikes down some of the more shrill voices in the debate. There is no general affordability crisis in pensions, the paper notes, despite the long-running efforts of militant individualists to bury DB. The system for protecting scheme members’ benefits is working broadly as intended, it asserts. Issues of intergenerational unfairness? Well let’s look at the evidence but make sure we understand the consequences of any change.
Its weakness stems from that same vagueness. No doubt pensions writers across the land will be scouring colour palettes for the appropriate term for this most green of green papers. Nowhere in its rather elegantly written (for its genre) 106 pages do you get a sense of a clear vision for the role of defined benefit schemes within a broader system that gives workers the chance of a decent standard of living in retirement. And some key calls are ducked: notably the document dismisses the potential benefits of moving away from using gilts as the basis for pension scheme benefits given the distorting impact of quantitative easing.
Here are three conclusions I reached from its contents:
- It shows that DB isn’t dead. Some 11 million people have entitlements to private sector DB pensions. More than one in ten schemes (13 per cent) remain open to new members. And most companies can well afford to service the obligations they have. Therefore we need to think more about nurturing the DB schemes that remain and means of applying some of their strongest elements to other parts of the pensions system, and less about declaring them obsolete.
- Much time will be spent arguing about inflation uprating of benefits. Again. The government is clear that it is not persuaded of across-the-board changes that would reduce members’ benefits. These are debts that should be honoured, it says. And undermining this principle would undermine trust. But it is willing to look at arguments for allowing under-pressure employers to make cuts without member consent. Yet there is little discussion of what sort of member consent would be needed if you are taking away the need to seek the consent of each individual to make a change to accrued benefits. Would the member voice be lost altogether? And who else would pay a price for such a cut: equity holders, debt holders, management? After all pensions are deferred wages, and this amounts to asking workers (and former workers) to hand back some of their wages to bail out the company.
- Consolidation of schemes is a remarkably slippery concept. There is a good case for the UK’s fragmented pensions sector to work more closely together. Greater pooling of investments is the obvious area. But when it comes to merging schemes, do we want the strongest schemes to merge, or the weakest ones? What is clear is that the government does not want to establish its own so-called Superfund. But the prospect of private sector operators creaming off profits from running schemes while members suffer benefit cuts on entry and/or when markets turn is not appealing. And we know terrible things can happen to savers’ money when there are conflicts of interest in the system.