Fighting the wrong battle? The pledge to protect pensioners from unscrupulous bosses
Theresa May has pledged to protect the pensions of workers against irresponsible behaviour by company bosses is the latest shot in the electioneering war of words on pensions. It follows Labour’s recommitment to the triple lock – a gaping silence in the Conservatives’ position so far.
The goal of the Conservative pledge is laudable. Protect the hard-earned money and retirement dreams of working people from the likes of Philip Green. Sir Philip, as he remains, continues to be a lightning rod for disapproval of aspects of British business. He makes an attractive political target for those who feel the system is “not working” (May) or “rigged” (Corbyn).
But pensions are complicated. Headline pledges frequently sink into the mud of detail. This is likely to be the case with the “anti-Philip Green” pledge.
There is a question of fairness. The pledge sets out two tiers of protection – enhanced supervision for schemes associated with a “merger or acquisition valued over a certain amount or with over a certain number of members in the pension scheme”. And the existing regime for everyone else.
So far, so good for some. The BHS scheme that Philip Green left behind had 20,000 members and would have triggered the extra supervision when he sold the company.
The problem is that the large majority of pension schemes are small and wouldn’t be covered. Indeed, the Pensions Regulator reports that 81% of Defined Benefit Schemes have less than 1,000 members (http://www.thepensionsregulator.gov.uk/docs/db-pensions-landscape-november-2016.pdf).
There is the minefield of pension scheme valuation. At the risk of enraging the actuarial profession, pension assessment demands as much art as science. Funding levels shift constantly. Different approaches to assessing the adequacy of funding have very different outcomes for the sponsoring organisations.
Defaulting to the “safest” assessments (e.g. discontinuance) to “ensure the solvency of the scheme”, as the Conservatives’ press release puts it, could not only severely constrain an organisation’s options, in worst cases they might also be self-defeating – generating questions over the sustainability of organisations and pension schemes.
An alternative to defending against unscrupulous bosses could be through facilitating greater small scheme consolidation. This should help facilitate more expertise for scheme Trustees so they can better utilise regulatory protections.
For sponsoring organisations, the Conservative proposal does little but complicate what is often already a fraught problem.
Sure, there are unscrupulous operators out there. But experience suggests that most organisations are responsibly trying to balance their obligations to multiple stakeholders, of whom pensioners are one.
Ultimately, there’s only so much cash to go around. An organisation can spend it, simplistically, through investing in its future or meeting the legacy obligations of its past. Organisations generally accept they must find a fair balance between the two. Government needs to be careful of the law of unintended consequences if it’s to intervene – stronger pension protection could all too easily mean pressure on investment and jobs today in exchange for stronger pensions “insurance” against potential future risks.
What many organisations need is greater flexibility, so they can more effectively and responsibly balance the demands of the future and the past.
This could be through making indexation more flexible to conditions, as is the case in other OECD countries. Exploring the stringency of insolvency criteria in considering Regulated Apportionment Arrangements (RAAs) should be explored. A meaningful dialogue between Sponsor and Trustees is essential.
In the meantime, those hoping for better pensions regulation need to be alive to the knock-on effects and unintended consequences that can too easily be triggered.