Reasons to be Cheerful

2008 saw a global financial crisis unfold and this triggered a massive debate in, among other areas, global pensions. Since Lehman Brothers’ meltdown in September 2008, the impact on the financial world in general, and pension schemes in particular, has been enormous, with many swinging from surplus to deficit in a matter of weeks.

According to recent research from Pension Capital Strategies, private sector UK pension schemes had a funding level of 98% in October 2008, under the standard accounting measure used in company reports, but this had fallen to 79% a year later. Strong performance in equity markets since March 2009 has not been sufficient to fill the gap – if anything, those gains are being more than offset by falling bond spreads and increasing liabilities. Rising longevity, uncertainty about inflation and interest rates and unpredictability within the equity and bond markets have added to the issues being faced. Many companies are now looking at risks within their pension schemes.

Even before the crisis, companies were transferring investment risk from employer to employee. In 2000, there were only seven companies in the FTSE 100 that had closed their defined benefit or final salary schemes to new entrants. Today, the picture is almost entirely the opposite, and there are only three (Tesco, Cadbury and Diageo) that still run a defined benefit scheme that is open to new members. And in more recent times, a large number of companies have taken this trend one step further and closed defined benefit schemes to future accrual. Vodafone, Barclays, Whitbread and Fujitsu have all closed schemes to existing employees. Following the precedent set by these high-profile companies, it seems inevitable that others will follow.

Transference of risk must be done fairly and with clarity. It is obvious that DC schemes are not as rewarding for long-term employees in the same way as DB schemes are. Employers have shifted emphasis from retention and reward to a transactional contract. Decisions and options need to be explained clearly: many people lack basic information or are sufficiently financially literate to make informed choices, though this is increasingly something that Government is legislating to improve.

‘The capital market volatility of the last few years has left DC members reeling. Nobody told them that all the risk and corresponding responsibility for decision making sits squarely with them. By acknowledging that a DC pension is something that needs to be done by someone rather than to them, service providers can start to develop propositions and messages that are better suited to an increasingly discerning audience. The industry would be well advised to start treating its customers as exactly that - consumers of a product for which there are numerous substitutes. Fully understanding the motivations and behaviours of our target audience is essential to the development of the next evolution of DC. The time for complacency is over’, agrees Nigel Aston, Director – DCisions

Innovation must meet needs, ensuring that new ideas deliver value, and creative minds must find new ways of meeting client needs. The Government has signalled their agreement on the need for pension reform, though the full scope of programmes is unclear. Professionals in the business conclude:

‘Market dislocations provide an opportunity for truly active managers to achieve good risk-adjusted returns and those that take a macro view of the world will find opportunities in the current crisis’, said Mark Hodgson, Managing Director of Gatemore Capital Investment.
According to Colin Williams, MD of Friends Life, ‘This watershed moment for pensions and savings may be leaving us gasping for breath. But Iain Duncan Smith’s lofty ambition to ‘make it crystal clear to young savers that it pays to save’ could be the coup de grace for savings inertia in the UK. This directive must continue to inform the decisions the coalition makes, but the industry must seize the initiative it is being handed. Changes to pensions and savings will continue to circle like confetti at a wedding, but private provision, so often the bridesmaid, is ready for its big day’.

Without credible innovation and viable products, deep-seated problems cannot be solved. Analysts and experts agree that the State will move away from pension provision, and employers will want to at best share the burden with the employee. There seems to be a responsible, informed and reasoned debate taking place right now among all stakeholders. On the surface it appears to be about pension provision in the future, but actually, the debate is about the kind of society we wish to live in. The hope is it will be safe, secure and sustainable and fair.