As The Pensions Trust rebrands to TPT Retirement Solutions, Mike Ramsey reflects on the challenges schemes are facing.
At a glance
- The deficiencies of current pension system in focus as baby boomers retire
- Schemes have matured quicker than the market was prepared for
- But alternative approaches for scheme management may offer better value
Now, as this group of individuals enjoys retirement, the deficiencies of the structures we use to support people in older age have been thrown into sharp relief.
State pension levels were allowed to erode over time and defined benefit (DB) occupational pensions have faced crushing burdens from increasing regulation and underfunding, leading to their closure, cessation and in worst case scenarios, collapse.
In the UK, the government has reacted by introducing a flat rate state pension to improve pensioner incomes and auto-enrolment to ensure that every eligible worker is enrolled into an occupational pension scheme.
Some commentators consider this to be the end of a golden era of pensions provision, but the obstacles facing occupational schemes have not come from nowhere and may prove instructive in the long term.
The early days
Things had started so well. In the 20th century, occupational pension scheme membership increased rapidly in the UK. In the 20 years up to 1956, the number of private sector schemes had grown from 6,544 to 37,000, according to data from The Pensions Archive Trust. This meant one in every three workers was covered by a pension in 1956. By 1970, this had increased so that 78% of non-manual, 50% of manual and 38% of unskilled manual workers were members of occupational schemes.
Privatisation in the late 20th century saw workers transferred from the public sector into private company schemes. The creation of personal pensions in 1988 saw many employees leave occupational schemes completely, though they would ultimately be recompensed for being sold a pup.
Pensions were used to attract and retain skilled staff in a time of reduced manpower after World War II. They never offered guarantees, but promises – more like gentlemen's agreements – of a defined income in retirement.
The turn of the screw
If the pensions promise was rather informal, so was the regulation, which was scant, and this 'golden age' has some skeletons in the closet. Part-timers and contractors were excluded from schemes and leavers were often heavily penalised.
This was – rightly – considered unfair and as a result, more and more regulation was introduced.
In 1985 companies were required to inflation-proof leavers' pensions and in 1990 pay men and women the same, following the Barber case. Those previously excluded also had to be accommodated and so the cost of providing a pension increased.
Following the Maxwell scandal, pensions regulation got serious, with legislation in the form of Pensions Act 1995 and the creation of the Occupational Pensions Regulatory Authority (Opra), the forerunner of The Pensions Regulator (TPR).
Schemes were required to tighten up on governance and justify their assumptions on the risks facing their fund.
MFR, FRS17 and IAS19 each contributed to the regulatory burden as schemes were required to explain why their funding seemed to fall so far short of how they had assessed their liabilities in the past.
Few – if any – were fully mindful of the mixed blessing of longevity. The advances in medical care saw people anticipating two decades or more of retirement instead of the year or two that covered their parents' generation. And so the costs increased.
Money, money, money
The subject to receive most scrutiny this century has been that of investment. By 2000, many funds had a balance of equities and bonds – perhaps with a little property – but it was mostly UK focused and the Myners report made it very clear that schemes should be doing more to diversify their portfolios. Despite making efforts to improve diversification, the perfect storm of the financial crisis of 2008 proved that diversification could be a fragile and fleeting thing.
With this crisis the low interest rate, low-inflation environment feted by the world's economies before the crash has been the undoing of pension fund investment.
Gilt yields – the historic basis of funding for occupational pension schemes – are at historic lows, undermined by the effect of quantitative easing (QE) and all but the best funded are feeling the pain.
The final analysis
Things may look bleak, but we are facing difficulties now because schemes have matured far quicker than the pension scheme market was prepared for.
Those running schemes knew they would have to pay out benefits, and with apologies to Winston Churchill, nobody could have predicted schemes would have to pay out so much to so many for so long.
Despite these turns of fate or the regulatory screw, occupational pension schemes – in addition to private saving – are at the core of the future of pensions policy.
Though pensioners who retire today have never had it so good – as a result of DB pension income, they have the highest ever levels of pensioner income compared to the general population – occupational pensions still face major obstacles.
As schemes become legacy arrangements, with increased cost and governance pressures, alternative approaches for scheme management may offer better value for money and make life easier.
Mike Ramsey is chief executive of TPT Retirement Solutions
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