The challenge of securing our retirement in a more capitalist age

To quote Churchill (who was actually talking about democracy): “Capitalism is the worst economic system - apart from all the others”. Few of us would argue against the benefits of the capitalist system, albeit most of us in Western Europe anyway, would say that there need to be regulations and restraints to avoid excess. We have social democratic political systems, mixed economies and welfare states. There are those who say that this status quo is now unsustainable over the longer term and that there has to be a major readjustment. And if we look at the world of pensions, at the changes that have already taken place and which are still underway, they have a point.

I have written here before about how the decline and fall of the defined benefit pension scheme happened without any Act of Parliament having been passed and without it having been in any elected party’s manifesto. True, there were some political decisions which perhaps helped hasten the demise of the DB scheme. But in truth this actually quite dramatic economic and social change happened almost by stealth and now that it has occurred there is no turning back. We have to operate a completely new pensions paradigm - and that actually means much more capitalism and much more risk. It is essential that employees realise this and that they take personal decisions accordingly.

The great merit of a DB scheme is that to a large extent the profit motive is removed from the decision-making process. The challenge for pension fund trustees, like me, is not the conventional business challenge of how to maximise profits and pay good dividends to shareholders. True, some of the tools we use are the same tools the businessman uses to run a limited company. We look for good returns on our investments, we seek to keep costs under control, we look for the best people to manage our activities and advise us and so on. And we identify who our stakeholders are and try as far as possible to meet their needs - especially, of course, our fund members. But the huge difference is that the DB scheme is not a conventional capitalist model. It is more of a mutual benefit society and one with a very long timeframe.

If the DB scheme is a mutual benefit society what is its successor - the defined contribution scheme? Well, the first thing to say is that the DC scheme is a much more diverse animal than DB - there are good, bad and probably pretty ugly DC schemes out there and this certainly does throw the onus on the employee. Caveat emptor with a vengeance! The initiative of the NAPF to have a benchmark for DC schemes, the ‘Pensions Quality Mark’, is very important because it emphasises the importance of good DC scheme design and management. That said, will a young person looking for a job/career actually take much account of whether a prospective employer has a PQM DC scheme in choosing a job (assuming that he has the luxury of choice in these difficult times)?

When I was in the first decade or two of my Shell career I paid little attention to my pension. I knew it was based on my final salary and that that would ensure a comfortable retirement - but that was it. However, a good friend of mine was a sales executive for a company that offered pensions to the self-employed. It was an up-market operation and he spent his time with well-heeled professional people who could afford to make provision for their retirement years. Superficially this company seemed to match the performance of a DB pension scheme - the personal contributions were much higher of course because there was no employer to pay into the pot. And the costs were higher too - much higher - not least to pay my friend’s and his colleagues’ generous commission and its senior executives’ high salaries and other benefits (including cut-rate mortgages). But over the years the company built its reputation and was seen as the market leader. Then it all went belly up, for this company was the Equitable Life - and we all know that gruesome story. The Equitable, nominally at any rate, was a ‘mutual life insurance company’ and as such not strictly driven by the same imperatives that drive a conventional capitalist business. But as various investigations revealed, there was greed and dysfunctionality at the top and incompetence throughout – and there was a “decade of regulatory failure” as well.

The Equitable Life scandal showed that as individuals we can think that we are doing the right thing about securing our future - especially if there are persuasive people around assuring us that all will be well. But when the provider is either solely driven by the profit motive or (as was the case with the Equitable) there is management and regulatory failure, we may unwittingly be taking a huge risk with our money. And when virtually nobody, in the private sector anyway, is offering us the alternative of a DB scheme any more, things can look rather bleak.

Paddy Briggs is a Member Nominated Trustee Director of the Shell Contributory Pension Fund. He writes in a personal capacity and the views he expresses are his own

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