Posted on Friday 16 September 2011 by Ulster Business
I was incredibly impressed by the quality of Deloitte as an organisation, by the talent of its people and the ethos of a client-centred approach. Having a reputation for fighting hard for my clients, particularly in the current economic conditions when business is tough for many, I felt that Deloitte was a perfect fit to continue to deliver that type of service in Northern Ireland. I was impressed that, quite independent from me, my team came to the same conclusion!
Going from flat out to chilled out was difficult although I don’t expect any sympathy! I struggled with not being able to help clients initially but gradually realised that the time would go soon enough and to make the most of it. I was given a DIY list from my wife and proceeded to find other things to do to avoid it – a few holidays for example and I was even spotted at the gym once or twice! I also have had the luxury of time to do more technical reading than at any other time in my life, so I won’t be rusty.
Deloitte has already made a significant investment in Belfast and in the rest of the United Kingdom, recruiting the most talented team around. This is in reflection of the fact that clients view dealing with their pension obligations as one of the key board-room problems to solve if they are to be successful. Despite the investment to date we are still recruiting – indeed, this month, we are taking some of the first batch of graduates from the actuarial degree course at Queen’s University.
As a qualified actuary I’ve been involved in advising trustees and scheme sponsors (the company) for over 20 years. This has included some of Northern Ireland’s oldest private sector businesses with the largest historic pension liabilities, and some of the newest public sector bodies, including the Northern Ireland Assembly.
Traditionally this has meant doing the number crunching in order to advise on how much the company needs to reserve to pay the benefits promised, or advice on investment strategy and in many cases also doing the administration of paying those benefits out. However, in the current climate most schemes have significant deficits and where Deloitte adds value is in helping clients find increasingly innovative ways to meet the obligations. This can include non cash funding solutions which protect cash-flow for the business. This reflects our view that the trustees’ best asset is a strong supportive employer. However, Deloitte advises many local businesses and the problems they face are just as significant for them, with the same need for innovation in the solution. Clients’ pension assets range from a few hundred thousand pounds to several billion.
Deloitte is unique in being able to offer a full service proposition to trustees and scheme sponsors. Given the complexity of pension problems, increasingly trustees need the advice of business analysts to assess and advise on the employer strength, corporate finance to help with restructuring, tax advisers and investment advisers, as well as actuaries and administrators. Deloitte’s pension team in Northern Ireland can provide a one stop shop for corporate and trustee pension clients.
The conclusion that has to be reached when people are not saving themselves is that unless the savings gap is closed in some way, proportionately more people will live in relative poverty in retirement than previous generations. This builds a social problem with the result that more people will rely on the state to stay above a basic minimum existence with the consequent increase in cost to the public purse. With previously altruistic employers realising that to stay in business they cannot afford to provide the level of pensions they once did, more emphasis will be placed on the pensions industry to encourage people to save for themselves. This will require innovative product development from the pensions industry, government support via tax and saving incentives and a greater realisation from the general public as to how valuable a pension is.
I would say, perhaps a little flippantly, that the choice of late has been between having a pension or a job, as to survive many companies have looked at lots of ways to keep their workforce (and skills) but reduce costs. Where it has been contractually possible this has included reducing pension costs or other benefits but also involved three or four day weeks and other employment terms. Prior to the current economic problems it was true that many more employers were looking at offering choices of benefit through flexible benefit plans. These allowed employees to select from a menu of options the benefits that were most valuable to them at that point in their lives. Senior staff could also be motivated by performance related pay or share option plans.
It will be significant enough, particularly for smaller companies who perhaps have not contributed to a pension for their employees before. Ensuring that all the administration is set up in advance will require careful planning, including the consideration of any existing pension arrangements. Recent surveys in the pensions press would suggest that the impact is not universally appreciated with significant numbers of companies not yet having thought about this. The changes may be seen by many companies as a further unwelcome cost of employment at just the wrong time.
Some of the larger companies may use the changes to effectively “level down” pension arrangements to the new arrangements. If this happens it will add to the looming social problem I mentioned earlier. The level of contributions from auto enrolment is a start if an individual has previously been unpensioned but it will not lead to an affluent generation of pensioners.
Rising life expectancy (normally a good thing), historically low interest rates, poor investment returns in the equity markets and now rising inflation all contribute to driving up the cost of pension provision for employers who support defined benefit arrangements. Over the last decade you could add increasing regulation and the associated costs, stealth taxes and shorter timeframes to make good any shortfall. It’s not hard to see why many have given up.
In a defined contribution pension arrangement the employee bears all these risks instead of the employer. So it’s not hard to see how individuals mistrust the pensions industry.
The challenge will be to convince employers and employees to save enough to target a comfortable retirement.
The public sector is now facing up to the problems the private sector has been dealing with for a number of years. I believe there will be a staged approach to reduce the cost (and consequently the value) of pension benefits provided. There is no overnight solution to this as the costs built up to date are huge. Look at the largest deficits in the biggest companies in the UK and you will see many are in previously nationalised businesses and the solution is long term if the pension obligations are not to cripple the business.
Dealing with this will need care to ensure public support and avoid industrial action, but also some innovation will be required to reduce the cost and risk to the public purse. There is no doubt that lower value benefits will likely be the outcome but care needs to be taken to target this correctly so that, for example, the lower paid are protected.
I believe so – in their current form. However, the defined contribution solution doesn’t seem to be the complete answer either as for many employees bearing the risk completely has not worked. Perhaps in the future there will be more hybrid types of approach where the risk is shared and better managed.
Pensions serve two purposes. The first one is to provide a level of pension that avoids poverty in retirement; the second is to serve as a savings vehicle where taking risk has less disastrous consequences if it goes wrong. It may be that in the future employers are prepared to protect against poverty by providing a reasonably low “defined benefit” with risk areas like improving life expectancy and investment mitigated. A defined contribution approach could work for pension savings above this minimum e.g. for the higher paid who arguably could afford to take on some risk themselves.
The point is there are many possible pension designs depending on the bespoke needs of each business.
When the basic state pension was introduced, life expectancy in retirement was only a couple of years. Now it is more than 20 on average. So the surprising thing perhaps is that it wasn’t addressed sooner by government or successively as life expectancy improved.
The key worry is for employees to maintain an alternative income until they are entitled to receive the state pension. However, with changes to the age discrimination laws it is less likely that someone will find themselves out of work on age grounds, but there needs to be enough available work, and people need to remain fit and able to work. There is the social question that if people stay on working for longer in a static economy, there were be less available jobs for young people coming on to the job market.
For companies supporting defined benefit pension schemes if there is no quick correction to recent market falls, they will be facing larger deficits which either will require higher contributions or longer recovery plans to make good the deficit. There are already a number of companies who have recovery plans that extend to 20 years.
For defined contribution investors invested in equities many have lost the equivalent of the last five years of investment performance and contributions. If they are close to retirement then this will dramatically reduce the amount of pension they can buy. However, some investors swap out of equities into bonds in the years approaching retirement to avoid the risk that the markets fall close to their retirement date. The effect on them would be less stark.
Every company in the UK would love its pension scheme trustees to “buy out” the pension liabilities with an insurance company to remove the risk. There has been some activity in this area with some high profile buy outs and partial buyouts (£1.4bn in the second quarter of 2011.) The problem for many is that it is simply unaffordable in the short term and particularly since the recent market falls.
Many therefore set buy out as the strategic aim but it may be 10, 15 or 20 years off and in the meantime they seek to reduce risk over time and remove liability in phases. Offering enhanced transfer values to ex-employees has been one such activity.
Many therefore view it as a “glide to buyout” but I expect there will be some turbulence along the way and a few crash landings.