Pensions News (PN) started the middle of last week by not spending time listening to the budget. PN started this week by struggling with the following paradox; “how poor does one have to be to feel that there is no option but to give up free money?”
Had PN sat in front of the radio or television last week, he would have heard the Chancellor of the Exchequer, Mr Philip Hammond, say a number of things about things unconnected with pensions and nothing of substance actually about pensions. PN was saddened at the lack of action on pensions but he was pleased that he had not sat around listening to hear whether the Chancellor would say anything about his, PN’s, chosen specialism.
Notwithstanding Mr Hammond’s decision broadly to leave pensions out of his budget (for the avoidance of doubt, comments about maybe bringing forward legislation on cold-calling does not count as actually doing anything in PN’s mind), the subject of pensions has still been in the news quite a lot over the past week or so.
Firstly, there was a pension-scheme-bashing story in which the pension scheme on the receiving end of the bashing was the Teachers’ Pension Scheme (TPS). PN has reported in the past about the difference between a defined benefit (DB) pension scheme and a defined contribution (DC) pension scheme. You, the reader, should not be too surprised to read, again, that the former (a DB scheme) provides benefits which are defined. Put differently, one cannot be sure what contribution is needed in order to provide the defined benefit. In fact, one needs a very clever person called an actuary who will guess the contribution, certify it (I mean certify the guess - not the person) and the contribution then needs to be paid. The latter (a DC scheme) involves contributions which are defined so that, put differently, one cannot be sure of the benefit until one is ready to retire. Yes; the clue really is in the title.
There are not very many DB pension schemes which are open to new members or, in fact, open at all. This is because the cost of making the unknown contribution is usually high and, well, unknown. Bean counters never like that sort of thing. Some of the DB schemes which are (still) open are public service pension schemes and one of the best examples of such a scheme is the TPS.
The TPS is a pension scheme which has been generally praised because it provides relatively generous defined benefits to its members. As indicated above however, it has been criticised because it provides a poor administrative service to those members. Members have complained that they have been spending a lot of time waiting in telephone queues or/ and being told to phone back later and/ or finding that their queries have been answered badly, not at all or incorrectly. PN feels sure that, as part of the process of being kept waiting in telephone queues, members were given several options on their telephones to listen to before pressing the wrong one and getting through to a person telling them what they would need to do to get a free TPS car sticker. As PN has suggested in a previous edition, having “options” is almost never a good thing on the telephone. Options on a telephone are not like options on a computer screen where one can click on a list, scroll down it and choose. Options on a telephone have to be listened to, one at a time, and the option one wants is rarely option one.
Mr Andy Hamilton once illustrated the point on BBC Radio 4’s programme “The News Quiz”. To make his point, Mr Hamilton read out the list of options presented by a NHS Trust if one dialled its main switchboard number after a certain time. “If you would like to participate in Sunday’s park run for the benefit of this trust, press 1. If you would like to donate money to this trust, press 2. If you would like to know more about how the trust benefits your community, press 3” and so on until the last option was “if you think you are having a heart attack, please redial 999 and ask for an ambulance”. Options on a telephone are clearly one of the least beneficial consequences of technology. PN and many people he knows have little enough time as it is so it is frustrating when a device ostensibly designed to save time ends up frittering away all too much of it. Some years ago, PN supported an initiative by Mr Clive James to ban any device which dealt with something in a way which was worse and / or took more time to deal with than when a “real” human being had dealt with it. PN would happily support a re-opened initiative.
It is quite possible that the NHS trust in Mr Hamilton’s (now fairly old) story has mended its ways. If so, it is just as well as the NHS has other problems to deal with and one of them involves pensions. The NHS Pension Scheme (NHSPS), like the TPS, is a DB pension scheme. It is known to provide valuable benefits to its members. Anyone in the NHS would, it seems to PN, reassure him or herself that whatever else happened, he or she would at least be able to participate in the NHSPS. Right? Wrong apparently. Reporting in the Financial Times (FT) of 25 and 26 November, Ms Josephine Cumbo observed that the number of younger NHS employees opting out of membership of the NHSPS increased sharply between 2014-15 and 2016-17. This news, printed in the FT, gave PN quite a shock since he had (somewhat complacently it turns out) thought that if one was eligible to participate in the NHSPS, it would be obtuse in the extreme to opt out. Well; wouldn’t it? It turns out that PN was wrong about that (actually, PN is told by the closest members of his family that he is wrong about most things regularly - but that has little to do with pensions matters). It is evident from the FT report that many individuals, including a number of young doctors, have opted out of NHSPS membership because they cannot afford to make the requisite member contributions of between 5% and 14.5% of their pay into the scheme. When advised that paying into a pension scheme is a tax efficient way of saving and that one would have to be “mad” to opt out of it, the young NHS employees have countered that the calls on their modest incomes are too great. One particular young doctor explained to the FT that, after taking repayment of student loans and accommodation into account, there was nothing left other than increasing debts. It made little sense, he argued, to go deeper into debt to pay into a pension scheme. Sensible advice about tax efficiency somehow did not change the young doctor’s view that the “something” that had to give was his pension contribution.
Writing in the same edition of the FT as Ms Cumbo, Ms Claer Barrett wrote a clear, cogent article in which she explained how participating in an employer’s pension plan was a good idea. She had explained this proposition to other colleagues in the FT by means of magic wands, with the aid of Ms Cumbo and by explaining that if one participated in a pension plan in which the employer matched employee contributions, one was getting free money. Ms Barrett put it this way: “If I were in charge [of the FT], I would rename the company contribution “free money” and print this in red, bold type on everyone’s payslips. It makes sense to make the biggest contribution you can afford to receive the most “free money” in return.” First of all, Ms Barrett is absolutely right; it makes complete sense to make the biggest contribution one can afford in to a pension plan because doing so is (a) tax efficient and (b) it means that the employer pays in too (hence the “free money” comment). The problem for PN and Ms Barrett’s argument is that far too many young people, including some very highly educated doctors (see above) are thinking about it, doing their sums and concluding that the biggest contribution they can afford is nothing at all. This news should come as a significant blow to the Government’s plan that everyone will contribute to a private pension plan and that this will save the state a lot of trouble as well as a lot of money in the future – as the elderly are unable to support themselves financially. The question is, will it come as a significant enough blow to make Mr Hammond or his successors do something? Given that the last report PN read on the subject was that it could cost this country approximately £10 billion to discharge itself from its EU pension liabilities, it is possible that Mr Hammond is running out of options. Perhaps he should reassure himself by telephoning the main number for an internet service provider, NHS trust or paper-free car insurer. He would wonder why he had ever wished for options if he did one or more of those things.
If you thought this article was relevant to you, press 1. If you thought this article might improve your chances of a mention in the New Year’s honours list, press 2. If you thought this article did not contain enough jokes about the current president of the USA, press 3. If you would like to revert to a society in which you could telephone a number and get through to a real person, find a remote spot, build a small fire and send a smoke signal.
Until next time…….