If we want the great ship pensions to stop sinking, we need to stop rearranging the deckchairs and start plugging the holes, argues Richard Butcher, independent trustee and managing director of PTL
According to my son, a physics student at Birmingham Uni, some boffins at CERN have recently discovered a new element: the pentaquark. Being a professional trustee, who should always have an inquisitive mind, I quizzed him on the matter.
Pentaquarks, which are a collection of five quarks or antiquarks in any combination, are a bi-product of the decay of another element and live for the merest fraction of a second. Although postulated some years ago their existence has only now been proven by experiment.
In physics, momentum (mass x velocity) is a constant. You can change the distribution of mass and velocity but only to the extent that it has a balancing impact on the other. In other words, what goes in must come out – albeit, perhaps, in a different form. As the boffins shot elements around the Large Hadron Collider, they couldn’t account for all of the mass and velocity in the output. The difference had to be something new: pentaquarks.
A colloquial equivalent to momentum being a constant is “re-arranging the deckchairs” – the act of re-arranging does not change the number or the purpose of the deckchairs it merely redistributes them.
A few years ago a pension guru said much the same about a set of pension reforms then being proposed, “the reforms”, the guru said “amount to little more than rearranging the deckchairs on the Titanic as our holed pension system sinks”. The guru went onto opine that unless we could recreate a savings culture, the prospects for retirement looked bleak.
The guru was one Dr Ros Altman. What ever happened to her?
The recent budget included a number of announcements on pensions. The most significant of these being the introduction of a taper on the annual allowance for high earners and a consultation on reshaping pension tax relief (from EET to TEE – but that’s for another day!). These are both significant, however, they are both further examples of deckchair rearranging. This is because they miss the three elephants in the room.
Firstly, there is not enough money in the pension system and, just as momentum is a constant so are pensions: money in has a direct correlation to money out. Neither proposal directly increases the amount of money going into the system (and in fact could have the opposite effect) and so will not increase the money coming out.
Secondly, pensions are not efficient enough. Much has or is being done on this (think increased requirements on trustee boards, the advent of IGCs, transaction cost disclosure and even Andy Agathangelou’s Transparency Taskforce) but we are not there yet. Pension governance needs to be improved further if we are to be able to account for all of the mass of money going in.
Thirdly, there is not enough trust in the system. In part this because much of the industry is luddite when it comes to communicating with, engaging with and educating members, but also because the government keeps fiddling – it keeps moving those deckchairs.
There’s matter, there’s antimatter, there’s dark matter but what really matters is this: We need a new formula for pensions.
(Stop fiddling with the tax framework) + (fix governance) =
(better engagement) + (more members in) + (more money in) =
Better outcomes for all the stakeholders.
Richard Butcher, is an independent trustee and managing director of PTL