The new year started with the last post in my series explaining the UK Pensions Landscape. This addressed how unfunded public sector pensions work and whether the government is accurately valuing the cost of these benefits. January was also the time to start the next stage of the project examining which pension issues need to be fixed to make the system robust. The first article questions whether current auto-enrolment contribution rates are sufficient, what level they should be and how to increase them. Financial Scale Partnership – of which I am part – also published its latest article highlighting how corporate scrutiny is on the rise and asset managers need to communicate better about their responsible investing criteria or risk being bounced into exclusions. Next month I’ll be writing more about the issues facing the UK pensions industry including the challenges posed by freedom and choice. I’d be keen to hear what other topics you think I should be covering.
Unfunded public sector schemes
I felt nervous writing this simple explainer on how unfunded public sector pension schemes are structured as I’m more familiar with how funded pension schemes function. But many helpful contributions to a LinkedIn post helped to point me in the right direction. I discussed how members and employers pay contributions into the scheme but these are used to pay current pensions rather being invested for the long term as it is a pay-as-you-go system. And the post highlighted the strong probability public sector pensions are currently being undervalued because the discount rate is over-optimistic.
Are auto-enrolment contributions adequate?
Why are auto-enrolment levels 8%? The Pension Commission determined this would be an adequate level to provide a minimum income requirement. But most scheme members think their pension pot will provide them with an adequate retirement. What levels should they be to make this reality? Many helpful contributions to another LinkedIn post helped me to ascertain lifetime savings rates should be closer to 15% for this post. Auto-escalation would be the best way to get to these levels.
Responsible investments under scrutiny
Asset managers are not comfortable in the spotlight. They prefer business-to-business communications with intermediates rather than talking to their end consumers. This article highlights how attitudes are changing with many more consumers feeling empowered to engage directly with companies. And the rise of responsible investing is only exacerbating this trend with more citizens wanting organisations to do the right thing. Unless managers want campaigners dictating their portfolio construction – such as excluding certain companies – they will need to communicate their responsible investment policy more clearly.
What are the most important pension issues?
In February I’ll be continuing the series examining the most important pension issues. The next topic to be addressed is the implications of freedom and choice five years on. I’ll be taking a close look at this excellent report by the People’s Pension and State Street Global Advisors which shows how people are sleepwalking into retirement and behavioural attitudes are creating important policy implications. What other issues do you think I should address? Please drop me a line and let me know!