Some thoughts on the future of pensions
by Ron Brociner
All
existing pension schemes suffer from failings. We should propose alternatives
to the present mess. One such proposal might be as follows:
The Government Old Age Pension is not funded and hence will never provide
an adequate living income to its recipients.
Some government backed defined benefit schemes, e.g. Local Government, the Police etc., are also not funded and will not survive the future increased cash requirements because of the political effect of ever increasing taxes to supply the necessary money.
Defined benefit schemes operated by the private sector are already under threat from the increases in regulation and the effects of an absence of growth in the values of shares on the Stock Market. The demise of lifetime careers with large stable companies and the penalties of job mobility for the prospective pensioner are a further nail in the coffin of what was a very good pension system, for those of us who were fortunate to retire with the benefits provided by such schemes.
The money purchase schemes, which are now finding favour with employers, have the disadvantage of forcing the pensioner to take out an annuity at a time which may be very disadvantageous to his future income. Another major disadvantage is that the pensioner’s assets are acquired by the company operating his annuity upon his demise. This could have the effect of transferring assets from the pension fund to the operating company’s profits. There is also a tendency for companies transferring from final salary schemes to money purchase schemes to reduce their contributions as they can no longer benefit from using scheme surpluses to fund “contribution holidays”.
I believe that there is a possibility to choose the best features of existing schemes and initiate a new era of security for future pensioners.
A new system would need to remove the administration of pensions from the employer to an independent non profit making organisation. Ideally there would be a number of such organisations to avoid the danger of failure or incompetence in one giant body. The model would be the Friendly Societies of yore. Removal of the administrative burden should find favour with employers although it would limit opportunities to use pension assets to fund redundancies or enhance the company’s bottom line by other means. The use of a non profit making administrative organisation would ensure that assets remain in the pension fund rather than be used for other purposes.
Employers contributions should be a fixed percentage of the employee’s salary or wage. The employee would also be required to pay a minimum percentage of pay to the fund. Provision could be made to allow the employee to increase his contribution above the minimum so that he could enhance his retirement income.
The employee’s accumulated assets in the fund would be identified and these would include his employer’s contribution. The employer would have no call on this fund. When an employee changes his job, he retains the assets in the pension fund. He also has the right to transfer those assets to another pension fund management group, should this be more convenient for his new place of employment. This would avoid the penalty of frozen pensions and would also assist job mobility.
When the employee reaches pensionable age, he should be eligible for a pension determined by the value of his assets in the fund and by the return on these assets that the pension asset management can achieve. In other words the pension is determined in the same manner as that of a Final Salary scheme except that there will be no employer’s top up should the fund’s assets drop by, for example, a Stock Market downturn to a level which necessitates a temporary pension reduction.
Under normal circumstances, ordinary fluctuations of the Stock Market should be accommodated by the prudent setting of pension values to smooth out these variations.
On reaching retirement age, employees should be able to draw a percentage of their accumulated assets as a lump sum, as is the case with present pension schemes.
These
are the bare bones of a system which would be fairer than the present
plethora of pension schemes, which would be funded and which would eliminate
the opportunity of employer fraud. There are many details, such as the
possibility of indexing, provision of dependents benefits, insurance
against provider failure etc. which would have to be worked out. However
if we are to argue for a better system for to-day’s employees, I would
offer this as a starting point.
R.E.Brociner
April 2002