A new deal for UK pensions savers

Jonathan Stapleton: What do you think are the major challenges facing the UK occupational pensions industry at the moment?

Terry Faulkner: Well, I think you'd probably have to look at this in two parts.

Firstly, there's the legacy of DB with big funds build-up and with big liabilities. It is also a legacy around the liability management and the asset management of those huge funds.

Secondly, for the future, I think the landscape has changed and it seems to be either DC or actually, maybe no pensions at all. The reason I say that is because pensions are no longer a major employee benefit for many companies, so why would you want to spend too much time actually managing a benefit that is of little relevance. I think people just concentrate on how much is needed to pay to protect the company and its reputation in the future, and then just move it outside into a contract-based delivery vehicle.

Jonathan Stapleton: Are these challenges solvable? Do you think there is anything that government or the industry could do to revive workplace pension schemes?

Terry Faulkner: I think it's difficult to go back to how they were. I think we've moved on from the traditional type of employee benefits, but frankly there are some things that can be done. We used to have a mix of what were broadly called DB and DC arrangements - one where there was some sort of underpin from the employer, which was DB, and one where there wasn't, where what you got was the contributions you paid in plus the return on them.

The DB schemes have been regulated out of existence effectively, for a whole range of reasons and some of the European stuff that is coming through is also causing a problem.

In my view, the way to solve it is to try to bring back a choice in employment, in employers deciding what pension benefits to give. We could see a move to a new type of cost sharing where it is possible to change the past, to change an accrual of benefit. I give an example from the government itself, because it unilaterally changed the date at which a female state pension would commence, moving from 60 to 65. It did it over a period of time by giving notice, so there was consultation, but it actually changed the past service benefit. If private sector people could have something similar that operates in a way that's actuarially neutral but actually fits the modern world going forward, then that will help. But of course the government, I'm, sure, have looked at it and have felt that they're unable to help, at the moment anyway.

Jonathan Stapleton: Looking at specific regulations the last government introduced, I know one of the biggest issues at the moment is restriction of high rate tax relief. This not only affects a small coterie of people at the top of an organisation, but seems to affect the running of pensions all the way through a business. Has that been an extremely negative step for the government to take, and could they have done things in a different way?

Terry Faulkner: Yes, the budget taxes coming in in 2011 are really horrendous for the industry. This is particularly the case for those that are in legacy DB schemes, but the same applies to DC schemes as well, and that's because it's been introduced as a tax on the individual. If these individuals have to find the cash from their own resources, that's really quite a lot of money to find in a very short period of time.

Of course, once you start looking at pensions for high earners - and in many companies the high earners are in the same pension scheme as everybody else - you find then that it's probably less attractive than it was. So you start to move to bring them out of pension provision and give them cash instead. That then has a knock-on effect on every­body else in a similar pension scheme, because once you take the decision makers away from enjoying that benefit you create a culture where maybe pensions are no longer relevant.

In the old days there was a paternalistic view from employers, and I think it's probably still there. However, the culture and the climate that the government has introduced to running pensions means that it's now pushed to one side and everybody's focusing on cost rather than on benefit to the individual.

Jonathan Stapleton: So is more advice and guidance needed?

Terry Faulkner: Yes, guidance and clarity is what we want, but of course that's not necessarily how governments work. They make their framework available but leave the detail until it is very late, and I'm not sure that they realise that it could cause a problem. This is particularly if you're in a trust-based environment, where it does actually take some time to change things.

Jonathan Stapleton: Do you think the introduction of NEST and auto-enrolment in 2012 is a positive thing in general, and how do you think they will change occupational schemes going forward?

Terry Faulkner: It is interesting that again the government has got involved in trying to design a type of pension scheme and a delivery vehicle for it. You might have thought that their role was to create an environment in which employers and individuals can make their own sort of pension arrangements. The 2012 introduction of NEST is inevitable I suspect, but I'm not sure their policy intentions will be met. 

I still can't see that it's a really burning need for low earners, because there are other priorities for them. I think what these reforms may do, especially when they are linked to restrictions on tax relief for high earners, is make the NEST type scenario a default option for many schemes going forward.

There are some good and bad things about NEST. It's restricted. It's restricted on salaries. It's restricted on sort of transfers. There's a huge political risk on pensions in this country. This government scheme is subject to political risk because the government may well want to tinker and change things. So I think the question that employers might ask, is that, in the years ahead, do they actually want to operate a pension scheme themselves, which is then subject to this political risk, or do they just adopt the government scheme as the standard for people and give them the option of how much to contribute? 

Jonathan Stapleton: Pensions as a whole seem to be becoming less important in terms of employee benefits. Do you think that's largely because they're more hassle to offer? Do you think the demise of pensions is also because people don't appreciate pensions as much as they appreciate other benefits that are perhaps cheaper to provide? 

Terry Faulkner: I think that's absolutely true. People don't appreciate the value of a pension. One reason companies offered pensions was because they had a huge reputational risk, particularly if they were a big employer in an area, if people retired and were unable to look after themselves in retirement. That has now largely gone away.

There is no real political risk because pensions have been regulated away, if you like. They're no longer attractive for employers. They're no longer that attractive for employees. I think people would prefer the flexibility to have cash and to do whatever they want to do with their money, which might be some other form of saving that isn't quite so long term. Because, you know, the one thing is if you put money into a pension plan, guess what? You can't take it out until you're at least 55.

There are times when you might need to access some funds, and if it's all tied up in a long term pension fund you can't actually get your hands on any money, but there are alternative vehicles that you might well be able to do so, and there are people that save for their retirement outside of a formal sort of pension plan arrangement.

Jonathan Stapleton: Moving on to a slightly different topic - pension scheme governance. There have been a couple of recent surveys that have reignited the debate about whether or not lay trustees should be paid. One survey found that 55% of lay trustees felt they should be paid. What's your view on this? 

Terry Faulkner: It is interesting that you just mentioned lay trustees. I'm a strong supporter of lay trustees. I think they're some of the best things to have happened to pension schemes, and again, you can thank regulation for that part of it. 

There would be nothing worse than having a board full of people who believe that they are experts and professionals at this, where they all bow to the great knowledge that's supposed to be there. Having a bunch of people with contrary views, real views, in the workplace coming forward and helping decision making in a trustee board I think is one of the strongest things that could happen.

Now as far as payment is concerned, I'm not greatly in the camp that we should pay trustees all the time. I think there's a strength in them coming from the workplace or former workplace, because obviously pensioners can be trustees as well. And I think if the company allows them time off, allows them time for training, and they don't lose out financially, then I'd sooner have somebody that's interested and volunteers than somebody that puts their name down because there's an extra £10 a week in favour of it. 

Jonathan Stapleton: So very much still in favour of the lay trustee model? 

Terry Faulkner: I must admit I am. There are people, such as professional trustees or independent trustees, that do charge for their time on these sorts of things, and it's absolutely right that they bring something different to a pension plan. But the strength of a pensions board still, in my view, is that it contains lay trustees that are not professional. They come with a different perspective.

Jonathan Stapleton: I'm compiling a list of ideas that I could take to the department for work and pensions, of very simple, inexpensive ways the government could improve pensions in the UK. We need something cost effective in these more constrained times and easy to implement as I doubt there will be much legislative time available for more radical change. Is there anything you would like to see the government do over the coming 12 to 24 months, or indeed for the government to stop doing that could improve the life of a pensions manager such as yourself?

Terry Faulkner: I think if we could really have an environment where a new shared cost type of pension scheme could thrive, I think that would be excellent. You know, DB to some extent is dead at the moment. DC is fine, but I'm not sure it's right for low earners. I think if there was some sort of shared cost model which means that you could actually control costs as things change, you could move retirement ages, for instance, as longevity increases, and that you could reorganise the past to suit the individuals, then I think that would be a really great help going forward. Why should somebody that's single be forced to actually have a spouse and dependants pension? Why should somebody in an occupational scheme that's on impaired life not be able to forgo pension increases for instance for a higher payment?

You can do this in the contract-based DC world, but you can't do it under the trust-based provision. So if we could get a new type of arrangement that allows shared cost but does allow things to change as longevity increases, then I think we could actually see a recovery in pension arrangements going forward.