The Future of Pensions re: Aberdeen Asset Management

11 Nov

The Pensions Intelligence Report is a government-appointed investigation into what the Minister of State for Pensions staunchly refuses to call the ‘Pensions Crisis.’ Aberdeen Asset Management presided over a summit on the major issues, at London’s Corinthian Hotel just off Whitehall. Suggested changes included auto-escalation, better gender equalisation, and more emphasis on workplace savings schemes that put employers and employees on a more equal footing.

Thanks to the introduction of auto-enrolment, by Christmas around 600,000 more people will have joined a scheme. For those who have opted out, or those for whom it does not apply, employer-subsidised ISA schemes based in the workplace can offer a viable alternative. Stephen Lefley, corporate distribution director at Zurich, suggested there should be a wider range of options which employees could directly invest their pot in, as at Microsoft which also offers a financial education programme to ensure workers made the right investment choices

Another suggestion was that executives could offer to have their benefits match the renumeration percentage of their employees, or perhaps just have a greater degree of equality in the way blue-collar workers are treated. The recent case of a company which offered cash incentives, or bribes, to employees to drop out of defined-benefit schemes is a case in point.

Steve Webb, Minister of State for Pensions, said there were a number of difficulties for trustees in the current economic climate. Number one was volatility, which has a very detrimental effect on compound returns. Other major problems are income, decumulation, volatility and employer risk. Smaller companies are still not fully trusted to invest contributions in a secure and profitable fashion.

“Pensioners are living longer and the birth rate is below the replacement rate.” He stated his concern about the consequences of this fact. The number of working people who will have to pay for pensioners’ benefits is projected to increase from four in 2010 to two by 2050. “You could argue this is the Mother of all Ponzi schemes,” he joked.

This makes it all the more necessary for employees to participate in private corporate schemes, and as soon as they can afford it. Steady payments from an early start prevent last-minute panic when workers reach middle age. Webb stressed, “We need to get across the message that it is socially acceptable to save.. It is socially irresponsible not to do it.”

Webb understood the legimitate concerns of those confused by the range of options available, or reluctant to add their accumulated benefits to a new company’s scheme if it was inferior: “I don’t want anyone auto-enrolled into a bad scheme.” Although he does not believe it is a problem for large companies, even the existing regulation is problematic. For example, it is currently illegal to offer a guarantee against inflation. A government commission on the effectiveness of the default state-run scheme NEST is in sitting, to try to identify, and remove, these bureaucratic constraints.

Lesley Alexander, who spoke for HSBC Bank Pension Trust (UK) Limited, avowed: “If the reforms go through that I know Steve Webb is championing, then I know we will get a decent flat rate state pension. Then once you have got a foundation, it is easier to build on top of it. But where you have got means-tested benefits and complications, whether their savings will ultimately be worth anything is questionable.”

Although most attendees believed that having the benefits threshold for pensions linked to the recipient’s income tax band provided a solid base of payments, many also wanted to explore the idea of auto-escalation. In America, this policy whereby pension contributions are increased automatically with a pay rise, is widespread. Another change the Pensions Minister is pioneering is for equalisation between genders, to be determined at the time of payment, with the end total being whichever of the two calculations is higher.

It is important not to discount changes to pensions policy because they are overly complicated, provided a concerted education campaign is made towards employees. One of the reasons often cited by workers for not enrolling is their fear of making the wrong decision. ‘Defined ambition’ is a potential solution, whereby employers and employees share the risk of performance in defined contribution schemes. Of those surveyed, largely employers, 54 percent believed such an approach could successfully encourage incremental savings for retirement.

‘Master trusts’ like the aforementioned state-run NEST have the advantage of a larger pool of capital to play with. Large professional schemes are also likely to have more inbuilt guards against risk, and to use techniques like hedging with derivatives and gold, and even to use passive as well as active investment approaches: if an asset is performing satisfactorily, wise investors feel it is better not to drop it in response to a volatility-induced blip in investor confidence. In order to out-perform standard indexes in the current economic climate, pensions need dynamic-run schemes, where assets’ performance are constantly re-assessed in line with market changes. People need to trust in their trustees, or find a scheme which a manager which does perform.Image


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