I’ve always enjoyed shopping at BHS so it was sad to see them go under after 88 years of trading.
I felt for the 11,000 staff, many of whom will now lose their jobs and take a cut in their pension entitlement as it falls into the hands of the Pension Protection Fund (PPF).
The figures paint a stark picture of an employer pension scheme deficit that had been allowed to rise massively since Sir Philip Green bought BHS in May 2000, reaching a colossal £571m when the retailer finally collapsed in administration.
In fact the year Green bought the business the pension fund had a small £5m surplus, rising to £12.5m a year later. But then things began to go horribly wrong, ending in a very public debacle.
The backdrop looks awful for Green, so I was expecting the Parliamentary Select Committee to tear him limb from limb when he appeared, after initially threatening to body-swerve the invitation to be quizzed by veteran pensions expert Frank Field and his team.
Instead, he got away with nothing worse than one MP staring at him so hard that Sir Philip told him to stop doing so. How did he get away with barely a scratch?
Largely, I believe, because he disarmed them by declaring that he wanted to put it right, and was working up a plan that would cost him big money to see BHS pensioners right.
Failure to communicate
We all know what was wrong with the BHS scheme – the employer hardly talked to the trustees and between them they allowed the assets to go so far out of line with liabilities that the pension scheme became a real block to any attempted rescue bid down the road – it became a noose around its neck.
Of course, what was right about the scheme was that it promised decent pensions, to a level that would provide a fair standard of living to retired BHS staff.
Now of course the world has moved on and in the private sector at least, workplace pensions are dominated by low-contribution DC, not generous DB, schemes.
Many DC schemes are appallingly bad if you look at the size of the retirement income that the average pension pot will produce. For many retirees, their employer’s pension is set to deliver no more than a small top-up to the state pension.
Employers have allowed the inertia of automatic enrolment to drastically reduce their per capita pension costs, while simultaneously denuding legacy schemes and running up pensions deficits.
But there may be some light at the end of this tunnel if Sir Philip Green does what he promises and sees BHS pensioners right. In that scenario, could we see the start of a change of heart by employers? Could we even see a return to the era where employers do right by their employees in retirement?
Big potential
DC pensions can be good if they have good communications, strong governance and high enough contributions. But employers need to offer more than the statutory minimum auto-enrolment contributions.
Today contributions are more miniscule than minimum and even from 6 April 2019, employer contribution will rise to just 3%, while employees will put in 5% of qualifying earnings including the tax relief. So even when we hit the top of the auto-enrolment contribution ladder we are some way short of providing a decent pension income.
So how are we going to get employees and employers to pay more in? We need to start by getting employers to engage their staff, helping them understand the value of paying more in through better illustrations and tools, online as well as in paper form.
They really need to get their staff to understand that, in the main, they are not saving enough for their ideal retirement.
Being able to show employees scenarios in which higher contributions translate into larger savings pots, which in turn delivers more promising income levels through a mix of decumulation options, is the key.
Right now regulation-led illustrations do not help our cause. They can run to six or seven pages and often start with very lengthy Financial Conduct Authority-required disclaimer-style pieces. They are a turn-off.
Dunstan Thomas is now working on a complete overhaul of illustrations for online, as well as hard copy, usage. Obviously, a great deal more can be achieved by delivering illustrations online. A flat ‘moment in time’ lengthy document in hard copy can become much more interesting online, especially if it’s interactive.
Areas like contribution analysis can be clicked into to explore what paying another £50 per month looks like in 20 years’ time at retirement for example. Elements of gamification can be put to work to draw people into this planning, engaging them in the mental conversation before, ideally, talking to an adviser.
We believe that pensions illustrations are on the cusp of major change but for complete transformation you have got to move them online, using mobile apps to draw people into providers’ illustration systems and making it interactive.
It is also a great opportunity for providers to get much closer to understanding their customers, their financial status and aspirations.
Adviser boost
It will also be a boon for advisers as some will inevitably respond to the stimulus by seeking expert opinion. The new £500 benefit-in-kind free advice limit is not enough for holistic financial advice but it is a start to nudge employees further to make better choices.
There is no doubt that there are clear efficiencies on offer for adviser firms supporting workplace pension scheme members. Employers limit lost productivity of staff while advisers can arrange several back-to-back meetings while staying put in the same meeting room.
It is also worth looking at the power of behavioural finance to persuade people to pay more into their pension in the future, perhaps following a salary increase or other positive change of circumstances which frees up some income to automatically trigger an increase of pension contribution. This concept, often called ‘save more tomorrow’ has worked very successfully to encourage US employees to pay more into their workplace pensions.
Is it time employers and workplace pension providers looked harder at implementing these sorts of systems to keep the momentum of increasing auto-enrolment contributions going once the stipulated ceiling rates have been reached?
The Pension Quality Mark has drawn a line in the sand and will not recognise a workplace pension as good quality until the contribution available reaches 10% of earnings, with at least 6% coming from the employer.
That’s still a whole lot less than the cost of a DB scheme, so I don’t believe it’s unaffordable for employers. Employers that adopt this sort of commitment are delivering a better distribution of the rewards of business between shareholders and the staff that do the work without which shareholders would get nothing.
If Sir Philip does put things right then he will again be able to sleep with a clear conscience on his beautiful £150m yacht.
But far more than this, he could start a positive trend of employers putting their workplace DC pensions in order – putting them right in the interests of existing and retired staff as well as investors and shareholders.
Adrian Boulding is head of retirement strategy at Dunstan Thomas
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