Great Talk, Hard Message: Defining the Future of Pension Schemes

It is now an acknowledged truth, I think (and so does he), that DB will be a creature of history within the next 10 years or so, except within the public sector. That is not to say there won’t still be legacy schemes in run off, of course, but the writing has been on the wall for several years, accelerated perhaps by recent economic events, but certainly not helped by overregulation, poor investment choices and increasing longevity.

The future is DC, but this does not come without its dangers. The movement of risk from employers onto members is a path fraught with danger. While contract-based schemes may be able to shift some of the responsibility away completely, trust-based DC arrangements still require considerable knowledge and skill on the part of the trustees in selecting appropriate funds and, in particular, the default option, which –let’s face it – will be the main option for most employees who are not financially savvy, and that’s probably 90 percent or more of the population. One can almost write the headlines at the first sign of a mis-selling scandal or the realisation that members’ retirement fund expectations have been wildly overinflated. Lindsay mentioned a frightening ‘vox pop’ video he had seen, where the prevailing view of the ‘man in the street’ seemed to be that for a 30 year old, a £10 per month contribution would provide a £20,000 per annum pension. It would be funny if it weren’t so very sad.

And what of NEST? The Government takes the view that this is the answer to the pension problem in this country. It is the project they have spent all their recent energies pursuing, probably to the detriment of other aspects of pension legislation that are just that bit ‘too difficult’ to deal with. Research is showing that employers will almost certainly take the cheapest option they can – paying the minimum contribution they can legally get away with. Even with the ‘maximum’ 3 percent and the total 8 percent contribution going in, a significant proportion of the target population may well be worse off in NEST than if they had simply relied on basic state pension only, together with means tested benefits which will be lost if they go into NEST.

The answers? If I knew that, I’d be making a lot more money than I am now!! What is apparent is that risk sharing schemes are dead in the water as far as DWP is concerned. Everything in the NEST is rosy. Except, dear politicians and civil servants, it really isn’t.

For expert advice on pension law, please contact Jennie Kreser on +44 (0)20 7749 2700 or email jik@silvermansherliker.co.uk. Follow her blog at: www.pensionlawyerblog.com.

This article also appears on Mallowstreet: www.mallowstreet.com.