In the second in a new series, Quentin Colborn, an independent HR consultant looks at the pensions deficit and wonders whether employers wouldn’t better serve workers’ needs by offering cash for bricks and mortar.
Pensions are still a very topical issue with much debate about fund deficits and the future, if there is one, of defined benefit schemes. But why are we so concerned about pensions and are they something that employers in the 21st century should be offering?
I don’t know when the first company pension came into being, but my recollection from history lessons tells me that the state pension was introduced by Lloyd George in 1911. Life has changed a lot since then, as have both the world of work and personal economics and wealth. So why are we so wedded to the idea of employers offering pensions?
Firstly, a pension where an employer makes a contribution is effectively a deferred form of remuneration. So it is part of total remuneration, an element of the benefits package.
But how many employees would rather have that remuneration now and be given the choice as to what do with it? Bearing in mind the level of house prices in the UK today, and knowing the difficulty that first time buyers have in raising a deposit and obtaining a mortgage, why do some employers insist on paying into a pension scheme on behalf of the employee when their staff may rather have the cash in their pockets today.
Many people in this situation may well see a property they would like to buy as being their personal pension fund – given the history of house price inflation it is not unreasonable to think that it will increase in value on a par with equities. So why not give employees the option of having their pension contributions in the form of mortgage support?
Perhaps another reason for employers providing pensions is a form of paternalism, a belief that the employer should make provision for the future even if the employee doesn’t. Perhaps this argument was valid when people were less informed about personal finances, but is this really the case today?
Yes, we all need to make provision for the future, but should the second tier of provision, beyond the state pension, be the responsibility of the employer? Why shouldn’t people take responsibility for their own pension provision without any employer involvement?
I appreciate that the current tax regime means there is incentive on the part of both the employer and employee to have deferred remuneration paid through pension contributions to remove tax and NI charges but that is simply done as a form of public policy, it shouldn’t really influence individual organisations and how they opt to remunerate their people.
There is a growing emphasis today on flexible benefits. Given the reduction in the average length of service of employees as well, I believe there is a strong argument against establishing benefits that far outlast the relationship with one employer.
The issue of tax relief for pensions could be addressed by removing it on a revenue neutral basis and implementing an equivalent reduction in income tax. So what would be the benefits of such a change?
Firstly, it would enable employees to make their own choice about when they enjoy their remuneration; secondly it would reduce the cost of in house pension departments as well as the additional HR administration that pensions bring.
If such a change were to succeed it would need to be supported by a real education of people about the management of their personal finances so that they could make informed choices. Why are topics such as this not on most schools curriculum?
So lets be open to change and reconsider whether it really is right for employers to be taking on this role in relation to pensions – there are plenty of other things to do instead after all!
Related items
- Feature: HRZone talks ‘pensions’ with Legal and General
- Editor’s Comment: Beating the pension time bomb
- Editor’s Comment: Bricks and mortar trap workers
Colborn’s Corner: series articles
3 Responses
Pensions – who needs one – everyone but in what form?
For most of human history the only viable pension was to invest in your children and hope that they looked after you in your dotage. With the breakup of family life this no longer happens so we need an alternative.
After industrialisation people worked until they dropped unless they were rich enough to save for their retirement or had a wealthy patron who would give them a pension when they became incapable of doing their job.
Our existing pensions schemes are based on most workers living only a few years after retirement. They are in trouble because we are living longer and are paying ourselves much more in real terms than ever before. The economic reality is that we will have to revert to a system of working for as long as we can or that we will have to accept less pay now so that we can enjoy more in later life.
In the last 50 – 60 years investment in property has provided a good return. Many of the better off pensioners are those who bought their own homes then downsized to release (tax free unless Labour has it’s way) equity for their retirement. Others have invested in rental properties to provide an income or future capital (sadly subject to capital gains tax) for their retirement. This approach does have social benefits – even the government has started to recognise that private investment which provides homes for those who don’t want to or are not in a position to buy is beneficial to society.
I endorse the underlying premise in Quentins article, that we need greater flexibility in pensions provisions but offer a word of caution – no scheme is secure – just look at what has happened to pensions in an era when the economy is supposedly doing so well. Perhaps if Gordon could explain how the lives of so many current / future pensioners have been ruined in a period of economic success it would boost confidence in his pensions strategy.
We need the right to choose from a variety of retirement savings options – that way when one market sector (like stocks and shares) suffers a down turn not all of our our pensions schemes will fail. The reality is that few employers pensions schemes achieve that variety – some will invest a proportion of their fund in property (mainly commercial) or art etc but few offer options to individuals. Allowing people control over their investments would encourage them to maximise their savings.
Many people who are not in pension schemes are saving for their future – by buying a house / stocks and shares or putting money into savings accounts etc. The Government and pensions industry fail to take these alternatives into account as it’s not in their interest to count these “savings” as a potential pension. If all savings options received tax benefits more people would be able to find ways to save for their future.
Give us a stick – and don’t take away the carrot!
Quentin has asked whether this particular form of paternalism is required nowadays because he believes people are now more properly informed about personal finances. Really? I think not! Most people are very poorly informed about personal finances. The education they do get comes from alarmist articles in the popular press – hardly reading designed to encourage long term saving! Whether or not one agrees with the overall tone that more freedom of choice of benefit should be the order of the day, one certainly cannot assert that the average employee is well informed about finance.
Even if the majority were well informed, the reality is they still would put little aside for retirement unless given very strong encouragement.
The government has rightly recognised for many years that one way to encourage retirement saving is through tax reliefs – the public policy incentive to which Quentin refers. Unfortunately, that simply isn’t enough. We need a stick and carrot approach if we are to avoid enormous problems with our aging population in the future. The carrot is there, and should not be taken away or that will worsen the problem. But on its own it is not working, so we need the stick too – compulsory pension provision as is the case in Australia.
Don’t throw out the baby
The recent poor press around pensions, much of it warranted, should not be allowed to detract from the need to make adequate provision and make it early.
The knee jerk reaction into property (which is the most positive financial experience for many people in the last 10 years)is understandable but does not come without drawbacks.
The liquidity issue, particularly if the investment is your home is significant & there is still an investment risk.
The education issue raised is key & people should be encouraged to take a balanced view of saving for retirement and understand the crucial part that pensions plays in this.