There have already been a number of pensions manifestos, demanding commitments from the main political parties to sign up to their demands. I think it might be a little presumptuous to make the same demands for my manifesto, but if any politicians do take some pointers from this note it might help to ensure that today’s workforce retires with a reasonable pension.
A new class of pension scheme is needed, not to replace final salary pension schemes, but to supplement them. Risk sharing defined benefit pension schemes are not a new idea – I’ve talked about them myself in this blog – but they are what is needed to give a real alternative to firms who are finding final salary pension schemes just too expensive.
The main points of the risk sharing defined benefit pension scheme I propose are as follows:
- It should be a career average pension scheme. These schemes suit mobile workforces of today far better than final salary schemes, where early leavers can see the projected values of their pensions drop significantly if they change jobs.
- There should be no guaranteed increases to pensions before or after retirement, only discretionary increases when funds allow. This would allow much greater investment freedom than is available when increases are guaranteed and included in solvency calculations.
- The same pre-retirement increases that are given to members still in employment should also be applied to the accrued benefits of former employees. In final salary schemes special protection is needed to ensure that deferred pensioners, who have no links with the company other than the pension scheme, are treated fairly. However, if all members got the same pre-retirement increases, then by looking after their own interests current employees would protect the interest of former employees.
- No dependents’ benefits should be provided. The increasing proportion of women in the workforce – who earn their own retirement benefits – means that death-in-retirement pensions are not as crucial as they were in times gone by.
- Retirement ages should be indexed to period life expectancies. The period life expectancy, which measures life expectancy assuming no future improvements, does not truly reflect future longevity expectations, but it is at least entirely objective – and it is important that increasing longevity does not decimate risk sharing schemes in the same way that existing final salary pension schemes have been damaged.
I have heard comments that offering a risk sharing option would be seen as letting employers off the pensions hook. However, giving them more choice does not force them to adopt the new type of pension scheme, and if employees don’t like it they are well able to make their views known. However, the gap between the current options is too wide, and some sort of third way for pensions is needed.
Once risk sharing pension defined benefit pension schemes were in place, private sector employers would have another choice for pension provision. However, good candidates for early adoption would be some of the public sector pension arrangements. These are so costly to tax payers, and so out-of-step with the broader pensions landscape, that they need to be changed somehow. These risk sharing arrangements would give then a different type of pension that still offered a salary-related amount at retirement.
So, to conclude, what I’m proposing would give:
- a way for private sector employers to reduce pension costs;
- a way to reduce the taxpayer’s bill for pensions; and
- a way to keep employees in defined benefit pension schemes, whilst accepting some of the risks.
Not too bad for my first manifesto!