Four contenders for the future of defined benefit pensions – one winner. May the odds be ever in their favour.
It’s the fourth quarter quell and the NAPF citizens in the wealthy district of Manchester are gearing up to watch the latest set of tributes battle to the death for the future of defined benefit pensions.
This games’ contenders are made up of ‘career tributes’, such as former pensions minister Steve Webb, who have been training all their lives for the Pensions Games.
The PFF’s chief executive Alan Rubenstein and Bill Galvin, chief executive of the Universities Superannuation Scheme will be facing him in the arena, defending their visions for the future of defined benefit (DB).
There is also one shock volunteer from the outer districts. Tim Sharp, pensions policy officer for the TUC bravely volunteered to take the place of the congress’ head of economics and social affairs, Nicola Smith, just hours before the event.
The opening ceremony
In the Manchester Central Training Centre, the tributes must show-off their skills to daunt the others and crucially to be given their scores by the game-makers, which will determine the support they receive throughout the battle.
This is a crucial stage, as one tribute with the lowest score will be eliminated before the fighting proper begins.
Deal with the well-meaning amateurs
Bill Galvin steps up first to show off his expert analytical skills. His plan to save DB pensions is to re-examine the role of the trustee.
“My proposal is that we’re honest with ourselves about the job description for trustees,” he explains. “Now this sounds pretty straightforward, doesn’t it, but in my view it is fundamental, and if we were the outcome would be revolutionary.”
He thoroughly details the issues with the pensions system and argues that at their core is the fact that many trustees are time-poor and untrained.
The qualifications for that role must be enormous, the bar must be set very high”
“[It’s] a meaty role isn’t it? The qualifications for that role must be enormous, the bar must be set very high. That role must have very high status.
“Well I guess in some places it does. But in a lot of places, it’s well-meaning amateurs, time conflicted without adequate training, put together with some utterly conflicted and time-limited executives, sprinkled with a few professionals and a regulator looking over the shoulder.”
The name is Bond – Pensions Bond
Next up is renowned archer Alan Rubenstein who wastes no time at all in pointing out to the game-makers than Galvin has made his first mistake.
“[I am] just one punter like all of you trying to come up with the best thoughts we can on what we might do to solve the problem that Bill has so eloquently identified, though not actually solved I don’t think.”
The crowd gasps, will Rubenstein’s shot hit its mark? This doesn’t bode well for Galvin’s score.
“I think we’ve got some big problems and to deal with big issues you need radical solutions”
He uses the confusion to lay out his own battle strategy – pensioner bonds. “I think we’ve got some big problems and to deal with big issues you need radical solutions and here’s mine. This is a pension bond. A bond that addresses the needs of pension funds. It deals with our problems, and it also deals with another problem which is providing some decent infrastructure for this country,” he tells the rapt game-makers.
Could this be it, they ask themselves? Will pensions bonds be the saviour of DB pensions?
He explains that the bonds will be long-term, say, thirty years. They might also be inflation-linked, and / or fixed.
Build a better Britain, save DB pensions”
Crucially, however, they will pay a yield which is 1% above the current rate so instead of 2.5% on 30 year gilts, they will pay 3.5%. They would only be available for pension funds and would be issued for a single purpose, used purely to build infrastructure projects such as schools, roads and hospitals.
“I’m asking you support pension bonds, build a better Britain, save DB pensions,” he concludes.
You’ve got to fight, for your right, to pensions
Brave volunteer Tim Sharp takes a different approach. He is not here to bury DB but to praise it, he explains.
He points to the fact that around 29% of employees aged over 16 are currently contributing to a private sector DB scheme. This means that occupational DB schemes still represent 49% of total workplace pension membership.
And these members are attached to their pensions. “The importance of pensions is often demonstrated, usually when they come under threat. So we’ve seen recently industrial action in the steel industry to defend DB benefits.”
The importance of pensions is often demonstrated, usually when they come under threat”
However there is no denying that DB is expensive for employers, costing maybe £20bn a year in employer contributions.
His solution is to make sure that these employers are getting the most bang for their buck. And the way to do this, he argues, is to move the responsibility for pensions to HR departments.
“Employers are failing to get the full value from these contributions, because many or indeed most have shifted responsibility for pension schemes from HR departments over to finance departments. There, a scheme is treated as a risk to be managed, and little else.”
I know that Steve will not have heard nearly enough about high-end sports cars over the years”
Drawing the battle lines for career tribute Steve Webb, he demonstrates his point with a Lamborghini analogy.
“I know that Steve will not have heard nearly enough about high-end sports cars over the years, but this is like buying your Lamborghini, paying for its upkeep, paying for its insurance, but not taking it out to show off to the neighbours, which is the entire point of having a sports car in the first place.”
Webb’s laws of politics
Last but not least, battle-hardened tribute Steve Webb faces the game-makers. Unsurprisingly his argument for the future of DB is one he’s been practising all his life: defined ambition. He is a career tribute after all, and won’t be coming into this cold.
Steve Webb’s laws of politics
1) You can’t argue from a hypothetical counter factual.
2) Pendulums always swing back
He runs through the three kinds of risk-sharing proposed when he was last in government. DB-lite, defined ambition and collective DC.
DB-lite is ruled out by Webb’s first law of politics. He explains: “The first crashed and burned. We suggested that future service only might not be indexed, and survivor’s benefits might not be continued. And I think the kindest headline I got was ‘Steve Webb threatens the slaughter of the first born’.”
The challenge is to convince someone that although an outcome is not as good as where we came from - it’s still better than where we might end up.
The kindest headline I got was ‘Steve Webb threatens the slaughter of the first born’”
The second two type of risk-sharing, however, are made possible through the 2015 Pension Act.
“When the appetite comes back, not least from employers who find that their employees can’t afford to retire because of the schemes that they’ve been in, we’ve got a regulatory framework that isn’t cobbled together on the back of fag packet, but has been thought through carefully over a period of years.
“So colleagues, my pitch to you is don’t let the 2015 Pensions Act gather dust on shelves,” he concludes.
The pitches are in and the game-makers’ scores are ready. Who will head into the Pensions Games with high scores and who will be cast out before the battle proper has even begun?
Bill Galvin – 2
Alan Rubenstein - 10
Tim Sharp – 4
Steve Webb - 6
Bill Galvin leaves the arena.
The games begin
The three remaining tributes stand on their platforms, waiting for the horn to sound and the games to begin.
Will they run to the cornucopia to add weapons to their armoury, vanish to make camp or begin the fight proper?
Rubenstein moves first, quick to collect new weapons. He hones in on the bow of inter-generational equality.
This is about taking the Lamborghini out of the garage, giving it a good wax and a polish and making sure it looks its best”
“If we are actually using this money to develop stuff for our children and their children by investing in the country. Then I think as pension funds, not only can we get a decent return for our members but we make a good transfer to the next generation” he says.
He added to his case, but hasn’t yet engaged in battle.
Meanwhile, Sharp is running to ground, hopeful of consolidating his position. Building camp, he reiterates the potential benefits of HR run schemes: “I think with the transfer of pensions management to HR, let’s have a proper rethink about communications. Let’s work towards combined benefits statements that have legacy DB benefits as well as accruing DC benefits. Or perhaps even state pension benefits.
Lovely idea, but won’t happen”
“This is about taking the Lamborghini out of the garage, giving it a good wax and a polish and making sure it looks its best.”
Let’s hope Webb didn’t overhear that last barb, as he’s on the warpath.
Firing his first arrow at Rubenstein he says, “Alan’s a charming guy - I enjoyed working with him in government - but beware the snake oil salesman! Alan’s just essentially offered you free money. Twice, in fact, I counted.”
Firing a second shot he continues, “Alan said we’re going to transfer to the young people, who so often miss out, by borrowing at above market rates paid for by our children… I think that transfers the other way.”
I think there is a phrase that the American gun lobby use: ‘out of my dead sweaty hand’…”
His final arrow, “I don’t think if I went to the chancellor and said, you know you can borrow at next to nothing. Would you like to pay more for your borrowing for infrastructure, I don’t think I’d even get through the door. So lovely idea, but won’t happen.”
He’s not going to let Sharp get away that easily either. “Likewise, getting HR to run pensions again for companies, I think there is a phrase that the American gun lobby use: ‘out of my dead sweaty hand’…
“I don’t see finance directors letting go somehow of the pensions companies, I think that ship has sailed.”
Will either of his blows hit the mark?
A gong rings out. Tim Sharp has been hit, fatally, and is removed from the arena.
The avid NAPF watchers can see the Rubenstein is injured, but it is not yet critical. Who will win this final head to head battle for the future of DB pensions?
The final battle
The time has passed for gathering weapons or making camp. Now Webb and Rubenstein must face off to decide the winner of this year’s Pensions Games.
Webb is keen to press his advantage. “I’ve inferred that my poll ratings soared when I was rude about Alan Rubenstein so I‘ve got about 55 seconds to do that now,” he says.
But Rubenstein parries swiftly: “If they say never appear on stage with children and animals, you can add retired politicians to that, because they will twist your words!”
It’s time for their final strategic shots to win over the audience and be declared victorious.
I’ve inferred that my poll ratings soared when I was rude about Alan Rubenstein”
“My plea to you is think big, support pension bonds, support DB and let’s build Britain,” cries Rubenstein.
“Actually Alan I think you’ve missed your career in politics. I think that building Britain was very rousing,” Webb ripostes.
He turns to the game-makers: “We could be ahead of the game, instead of being an industry of government and regulators who react to the last crisis, we could regulate, legislate, not in haste but with a measured consultative wave so that as demand rises, we’re there.”
Silence falls in the NAPF. The Pensions Games has a victor. Rubenstein lays fallen, while career tribute Webb is victorious. The battle was closer than anyone had expected, but the Pensions Games are now over.
Until next year….