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Nurturing
pension provision
Figures
indicate a total pensioner population of more than 12 million by
the year 2040. Chris Bond takes an in-depth look at the issues facing
the £31 billion a year corporate pensions market
With
this month’s general election upon us, there has been a great
deal of public debate on many important issues of national importance
including that of pensions. It remains to be seen what the next
parliament will do to encourage or develop provisions made through
company pension schemes.
Maybe there will be little change. After all, the company pension
schemes marketplace has matured into a £31 billion a year
industry. The government has now seen in stakeholder, a low cost
option which will, as a minimum, offer a fallback position for employees
in all but the smaller employer marketplace. It would seem then
that everything is rosy and that company pensions are sorted –
but are they?
Ensuring that all eligible employees understand fully the benefits
available to them through their company scheme is a difficulty.
As can be seen from the numbers in the table on the opposite page,
in 1996, the industry was far from providing 100 per cent coverage
in terms of pension provision.
Many employers now recognise that the provision of pension benefits
is a pre-requisite for both recruiting and retaining employees.
So why should there be any further moves when there are already
substantial tax advantages to be had, and when the existing occupational
pension schemes market is so large?
Demographic
issues
There is a persuasive case based on demographics alone for pensions
to be looked at most seriously.
Like most of Europe, for some decades we have experienced improving
mortality with the number of pensioners set to increase by over
three million and a total pensioner population of more than 12 million
people by 2040. So we have a high proportion of today’s workforce
who need to have investment now for their future retirement. In
addition, the cost of converting cash to pensions is increasing.
The ratio of pensioners to workers is on the up and people are retiring
early, expecting to lead an active retirement.
It has been forecast that by 2015 the basic state pension will be
less than ten per cent of average male earnings. Clearly the state
cannot provide adequate pensions for all.
The
impact of the one per cent market
Stakeholder pensions have already started to have a profound effect
on the broader pensions marketplace. The ceiling on product charges
for most defined contribution plans, whether occupational schemes
or personal plans has been effectively set at a maximum of one per
cent per annum of the funds under management.
The impact on margins of providers are under pressure and this will
heighten as volumes of low margin business increase. Technology
will be key with the internet playing an increasing role in speeding
up the collection and provision of information. Fundamentally, we
need to change the end to end business processes rather than bolt
on an internet front-end to inefficient processes and outdated systems.
Another major impact of the growing low charge market is linked
directly to the sales process. Service providers will now be looking
to offer “worksite marketing” support through materials
and services which will ensure quality communications of the benefits
available and an increase in the numbers of employees taking advantage
of the benefits being offered to them.
Employee
benefit quality
Individuals left to their own devices will often not give the level
of priority to retirement planning that they would really wish to.
The same is probably also true of employees working for employers
with an occupational scheme in place.
However, company schemes are acknowledged by many as offering a
number of key advantages to employees:
• The introduction of a company pension scheme brings with
it the understated benefit of financial awareness.
Each eligible employee will need to think about pension benefits
and make a decision on it. Without such an offer individuals may
fall through the net and fail to make proper provisions.
• Tax contributions paid into a scheme enjoy tax relief.
• Favourable tax terms are granted on contributions invested
into a scheme.
• Employees may enjoy an extremely favourable deal financially
with employers, often paying most or sometimes all of the costs
for the benefits.
So, it would seem that employees may do very well to be offered
membership of a pension scheme offered by their employer.
It is also the case that membership of a company scheme does not
in itself guarantee that every member will have secured a satisfactory
level of pension at retirement. Many factors influence the resultant
pension and perhaps most importantly are the level of contribution
(employer and employee) invested and or the guarantees being given.
It really is back to basics about pensions planning. Unless sufficient
funds are invested the risk arises that retirement benefits will
fall short of those required.
To what extent the recently introduced stakeholder schemes provide
adequate benefits will soon emerge. Experience in the recent past
shows that, on average, contributions into group money purchase
schemes are lower than defined benefit schemes and that contributions
to group personal pension plans are, on average, lower than group
money purchase schemes. This point does not sit pretty when we see
the trend away from defined benefit to defined contribution. And
now we have stakeholder – what will this bring to the debate
on quality of benefits?
We have a large and well-established marketplace for company pensions
but any exuberance should be tinged with caution. We should maximise
the opportunity to use newly developed products and systems but
at the same time be equally vigilant in continuing to make every
effort to promote high quality benefits for all.
Chris
Bond is stakeholder promotions manager at Friends Provident
–
Pensions Age June 2001–
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