Historically employers have provided pension schemes to their employees for all sorts of reasons: maybe to be competitive amongst their peers, because they felt paternalistic or because they were obliged to.The provision of a good pension schemes, however, isn’t a one way benefit street.
There have been advantages to employers as well – so called Good Employer Outcomes (GEOs).
A key GEO is the ability to manage the exit of an older employee from the workforce. If the 75 year old warehouseman has a decent pension it is easier to have him stop climbing your ladders and go home. This GEO has become even more valuable since the abolition of the “default retirement age” before which employers were able to compel an employee to retire.
The headline announcement in the budget was the relaxation of the rule requiring retirees from DC pension schemes to provide for an income in retirement; instead they can take their entire pot as cash (although 75% of it will be subject to tax as if earned income) and do what they want with it including, according to the Pensions Minister, buying a Lamborghini. This particular idea is subject to the parliamentary process but has the support of the main parties and so is likely to pass into law.
Another proposal, made in the budget, is that these members be able to take this sum at any time after they pass the minimum “retirement age” – currently 55. This proposal is subject to consultation and the Parliamentary process but if adopted would override the trust deed and rules of all pension schemes. Members would no longer need the consent of their employer or trustees to take the cash early, it would become a right.
Whether or not you support these two proposals it has to be acknowledged that these two changes, the right to full cash at a time of the members choice, along with the introduction of Auto Enrolment a couple of years ago, rather uncouples the employer from the pension function. They have to provide it, they cannot influence what the member does with it nor when they can take it. In effect, the change reduces their ability to use the pension scheme to help them manage the exit of their older employees.
James has worked for the company for 29 years, he is 56. He has been a member of a couple of pension schemes during his working life but the various pots have followed him and are now all within the Papillon Electrical Pension Scheme. Budget 2014 changes the rules and James decides to take his pension pot which amounts to a few hundreds of thousands of pounds. He pays off his credit card, his mortgage and a small loan he took out to buy his wife Eila a ring on their 30th wedding anniversary. He helps his two daughters, Laura and Kim, with deposits for their first homes, after a bit of discrete negotiation he also pays off some other debts Laura has. He replaces his nine year old Vectra with a new one (he’s always wanted a brand new car) and that summer he and Eila take themselves, the girls and their boyfriends to Portugal where they’ve rented a villa with its own pool for two weeks.
Ten years later, James boss asks him if he’s thought about retirement. James has, but he’s also discovered that he can’t afford to. The state pension isn’t enough to live on and what’s left of his pension pot doesn’t boost it far enough. He stays on. And on. And on.
This decoupling of an employer from the benefits of a pension scheme will influence how they think. If they can’t use their contributions to help older employees to retire, why pay the contributions?
In years to come we will decide whether the 2014 budget was good or bad. In the meantime what is certain is that it places uncertainty – risk – in the heart of pension policy. One risk is that decoupled employers will reduce their pension contributions, making Good Member Outcomes less likely.