Great Talk, Hard Message

I went to an excellent talk by Lindsay Tomlinson the Chairman of the NAPF last night. The man talks a lot of sense. The main thrust of his speech was concerning the now certain death of the the DB scheme and the rise of DC and with it NEST eggs.

It is now an acknowledged truth I think (and so does he) that DB will be a creature of history within the next 10 years or so except within the public sector. That is not to say that there won’t still be legacy schemes in run off of course but the writing has been on the wall for them for several years, accelerated perhaps by recent economic events but certainly not helped by overregulation, poor investment choices and increasing longevity.

The future is DC but this does not come without its dangers. The movement of risk from employers and onto the members is a path fraught with danger. While contract based schemes may be able to shift some of the responsibilty away completely, trust based DC arrangements will still require considerable knowledge and skill on the part of trustees in selecting appropriate funds and in particular the default option which – let’s face it – will be the main option for most employees who are not financially savvy – and that’s probably 90% or more of the population. One can almost write the headline in the Daily Wail at the first sign of a misselling scandal or the realisation that members’ retirement fund expectations have been wildly overinflated. Lindsay mentioned a frightening ‘vox pop’ video he had seen where the prevailing view of the ‘man in the street’ seemed to be that for a 30 year old a £10 per month contribution would provide a £20,000 p a pension. It would be funny if it wasn’t so very sad.

And what of NEST? The Government takes the view that this is the answer to the pension problem in this country. It is the project that they have spent all their recent energies in pursuing probably to the detriment of other aspects of pension legislation that are just that bit ‘too difficult’ to deal with. We know that research is showing that employers will almost certainly take the cheapest option they can – paying the minimum contribution they can legally get away with. Even at the ‘maximum’ 3% and the total 8% contribution going in, a significant proportion of the target population may well be worse off in NEST than had they simply relied on State Basic pension only, together with means tested benefits which will be lost if they go into NEST.

The answers? If I knew that, I’d be making a hell of a lot more money than I am now!! What is apparent is that risk sharing schemes are dead in the water as far as DWP is concerned. Everything in the NEST is rosy. Except dear politicians and civil servants…it really isn’t.