In a recent CIPD survey, over 70% of our eligible working population are now covered by some form of workplace pension arrangement. In part, this is due to the introduction of the Workplace Pension, affectionately known as auto enrolment and the recent TV advertising campaign to broaden awareness.
But with any analysis or statistics, the devil is in the detail and whatever pensions survey you look at, you are masking the great divide between private and public sector pensions. You can talk of the great divides – North and South, rich and poor, City and United in Manchester but then you have those whose working life has been based around a private sector business and those who have worked in the public sector.
Among those now in a scheme, 57% of private sector employees are in a pension scheme and 69% of the public sector employee respondents in the survey were in a final salary or defined benefits arrangement.
If you are in your mid 50s with a carer in the private sector, it is likely that you had the opportunity of a final salary scheme at some stage but the likelihood is that your final salary scheme was closed in the mid 1990s with your benefits deferred and you are now in a defined contributions or money purchase scheme. The person in their mid 50s with a lifetime in the public sector is probably now contemplating retirement at 55 under the “rule of 80” where you are eligible for a full pension if the combination of your age and years of service in the public sector pension scheme equals 80.
Whilst there are still some private sector businesses with a final salary scheme, these are very few and far between and where the schemes do exist, the likelihood is that they have a significant deficit due, in part, but not entirely to greater life expectancy – or, to put it simply, the longer we live, the longer a scheme needs to fund a pension. Average life expectancy is now 81.3 years compared with 75.9 in 1990 and the trend is to continue upwards. Whilst this must be hailed as good news, it represents an increasing challenge for pension funds.
This divide is felt very sharply in contracting businesses where the Transfer of Undertakings (Protection of Employment) Regulations known as TUPE are a common feature of their activities and as contracts transfer between contractors, common place with Cleaning for instance, employees TUPE transfer. The pensions issue is felt most acutely when contracts are transferring for the first time out of the public sector to private contractors – as we see when Academy schools are created and opt out of the Local Education Authority control and non teaching staff including Cleaners, Grounds Maintenance, Building Technicians, Caretakers find themselves working for a private contractor.
Invariably, this is a culture shock for the employees due to different working practices and accountability controls, even though under TUPE, their terms and conditions are maintained and more specifically, the private sector contractor has to put in place a pension provision that is comparable and ensures that the employees transferring out of the public sector suffer no detriment. For the employee transferring, they have continuity of service but peace of mind and job security are uppermost in their minds through the process but the employer faces the challenge of organising a pension scheme which can involve employer contributions of up to 30% in some specific situations as well as the professional, advisory and actuarial fees associated with scheme set up.
The result is that on occasions, the cost of providing a pension will influence the decision about proceeding with a bid. The issues are surmountable and in theory, the cost of providing a pension will be the same for all bidders but the bigger companies are more geared up for managing large scale out sourcing of contracts from the public sector and naturally have deeper pockets and a wider net over which the pension risk can be spread.
We live in a society where we expect to live longer and attitudes are changing towards pensions and with the uncertainty of fluctuating returns on annuities, there is a growing wave of people with a DC pension who are cynical about the amount of pension their “pot” will buy and are taking the view that investing in property and specifically the “buy to let” market is a sound option. Then you factor in the Chancellor’s master stroke in allowing people 55 and over to take 25% of their pension pot as a tax free lump sum – and for a lot of people, that would be a nice deposit on that “buy to let” property which gives an income from property as well as a pension, albeit reduced, in retirement.
Either way, as an employee, pensions have the potential to divide us in terms of what we will get in retirement dependent on whether we were in a DC or DB arrangement whilst for private sector companies, especially SMEs tendering for business as a first time outsource from the public sector with TUPE implications, the whole question of pensions must be looked at with caution and a high level of attention to detail.