IEBA Debate
This house believes there is no future for single employer pension schemes
Why employer must play a key role
§ There are three parties who can play leading roles in pension provision. These are the State, employers and individuals.
§ First, let us look at the State as lead provider.
· The State played a leading role in continental European pension provision and countries with this model are now trying to reduce the State’s role e.g. Italy, France, Germany.
- Primary reasons for this are that the State is prone to giving excessively generous promises and there are serious political obstacles to making necessary changes in benefits.
- Survey after survey shows that much of the working population does not trust the State to deliver its pension promise. Unfortunately the history of pension reforms suggests that such scepticism is well founded.
- Voters are unwilling to trust governments with tax increases and this weighs heavily against arguments for substantial pension provision through the State system.
- The huge implicit pensions debt of many countries with extensive State provision has widespread and scary implications for the country as a whole, particularly faced with the ageing of most, and indeed all western, populations.
§ Next let us consider the individual taking on the dominant pension provision role.
· Quite simply, most people are not sophisticated enough for the complex decisions and choices needed in planning adequate pension provision.
· An individual cannot take risks at the same level as a larger entity. No individual can be expected to take:
- salary,
- investment,
- inflation, and
- longevity
risks in an area as important as their future income and where they cannot afford failure.
· A move to individuals taking responsibility for their own pension provision would be likely to prove politically untenable in the UK or Ireland where this would be operating alongside public service employees who have Defined Benefit pension plans which fully insure them against all the risks which the individual would have to bear in the private sector.
§ This brings us to the employer as the third possibility for a mainstream pensions role.
· After the “family” the employer is the next structured group to which most people will belong. It seems unlikely that the family could play an active pension provision role so that leaves the employer as the only collective group through which pension provision can be organised.
· The Employer Task Force on Pensions which reported to the UK Government last December, said clearly that employers should recognise that they have a responsibility to help fund the pensions of their employees. This fits in with the widely held view that pensions are actually “deferred pay” and that pay and pensions should be considered as one.
· The employer role is vital because it provides the most effective channel for pension saving. It is, in particular, the most “trusted” channel because in an increasingly untrusting world people still tend to trust their employer.
· The employer role sets in place a mutual support structure and is a private sector solution which fits in with the social and economic culture of most developed countries.
· The employer channel for savings is also the most cost effective because it can negotiate terms and contracts unavailable to individuals. And employers are in a better position to deal with risks, and in particular, to deal with longevity risk more effectively and cheaply.
· There are many benefits for employers in making good pension provision and, in particular, it is a means of attracting and retaining staff. Arising from all the sad pension histories of recent times, there is now a much higher level of pension appreciation amongst the public and availability of a good employers’ pension scheme is now something which existing and potential employees recognise and value.
· Private savings are encouraged in most countries but it also now seems clear that they need to be induced as well as encouraged. Employers are able to induce the desired savings behaviour by offering employer contributions as well as the employees’ own savings.
Form of employer involvement
§ Employer involvement could, of course, be achieved through some form of grouped arrangement but this would take away the potential for individual employers to get the full benefit of being an attractive employer for retention and employment purposes.
§ Also, all employment situations are different and operate in changing environments. Control of the employer’s own pension arrangement is important so that it can be operated to reflect other influences on the employer’s activities.
§ The EU Pensions Directive’s main focus appears to be on single employer schemes. I believe the Directive will lead to pensions development and change and that the Directive’s impact will be in the single employer scheme area.
Multi Pillar is recommended way
§ Serious pension researchers have all come around to the view that a multi-pillar pension system is the best way forward. This usually ranges from three pillars to the more recent suggestion of some combination of five pillars in the recent World Bank report on Pension Systems and Reform.
§ The middle pillars of any such structure, be they mandatory or voluntary, are best facilitated by a level of employer sponsorship. Whilst most countries encourage employer involvement, I would like to add that this needs to be nurtured as well as encouraged. It is probably fair to say that some recent developments which increase pension cost are discouraging employers who are otherwise willing to play a positive role.
§ The UK has seen some of the more active and sophisticated debate on future pension provision and this has included various employer roles. Most recently the Conservative Party have proposed that employer incentives are the key to restoring the savings culture and countering the decline in the nation’s savings. The Labour Party have, of course, also promised a new approach to pensions and the report of the Pensions Commission is eagerly awaited. Whilst it is not yet known what direction will be recommended, there has been no indication of dismantling the current UK employer-based pension system which is recognised as playing a very important role.
Conclusion
§ I will conclude by saying that a pension system which does not include a strong employer role is very unlikely to be successful and that employers will be best able to get real benefit from their role if they retain control through the single employer pension scheme. Therefore I ask this house to reject the motion that “there is no future for single employer pension schemes”.
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Anne Maher
Chief Executive
The Pensions Board, Ireland
14 April, 2005