Issued on: 3 November 2010
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Sarah Smart, Chair of the Trustee at The Pensions Trust contributes to FT SchemeXpert Website on a monthly basis. Below is Sarah's third article 'Why should privare sector workers settle for DC? |
Lord Hutton clearly does not believe that defined contribution pension schemes are good enough for public sector workers. Why, then, should we accept that they are good enough for private sector workers?
Last week I spoke at a breakfast seminar on Governance for DC schemes. The focus of the seminar was to emphasise the importance of employers providing some governance oversight for contract-based DC schemes. The audience was not as large as we would have hoped for, demonstrating, I think, that with this type of seminar we are trying to appeal to a select group of employers. Outwith our target range are those employers who take the welfare of their workforce very seriously and willingly strive for best practice in the benefit package that they provide. Also, unfortunately, outwith our target range are those employers who only ever provide the minimum of what they are legally obliged to. Our focus should be on those employers who would like to do right by their workforce, but don’t really know where to start or how to find their way through the maze.
Everything went well enough and I think I was beginning to win people over to the benefits of providing a certain level of governance oversight (or at least the pitfalls of not doing it). Then I was asked the killer question: “But this all looks a bit difficult. Would it not be easier just to put everyone in NEST?” Indeed. How do we expect to incentivise this crucial group of employers to do something more than the absolute minimum if doing that little bit more involves so much extra work for them? Surely we as an industry can come up with an alternative that makes them feel good about the level of benefit they are providing, that actually provides a worthwhile benefit for the member and that is not made unfeasible by the additional risk and cost?
What might such a scheme look like? It could have the following features:
• The employer has to make a single collective contribution payment once a month, comprising both employer and employee contributions – no tricky split of contributions by individual is required.
• All assets are invested collectively, so there is no need to think about the range of fund choices to make available to members, or to spend time designing the default fund.
• A defined pension is paid on retirement, meaning the employer does not need to worry about communicating the complexities of ‘decumulation’ and the member does not need to worry about buying an annuity.
• Crucially, the cost to the employer and the member of this scheme is in the same ballpark as today’s standard level of contributions into a DC pension.
A 1/120th CARE DB scheme could provide all of these features and, I believe, provides employers with a realistic alternative to the complexities of DC schemes. Despite the numerous and well publicised assassination attempts on DB schemes over the last few years, I remain hopeful that they may yet prove to be Rasputin-like in their resilience and stubbornly refuse to lay down and die.