Home > News > 2009 > August 2009 > Pension Veteran, Adrian Waddingham, predicts the return of DB schemes
Pension Veteran, Adrian Waddingham, predicts the return of DB schemes
Adrian Waddingham talks to Steve Johnson at FTfm:
UK corporate reporters have become attuned to spotting a sad litany of footnotes of late. All too often, it seems, companies are using the backdrop of poor results to announce the closure of their defined benefit pension plans to new members, or even barring further accrual by existing members.
The UK’s DB pension industry, once one of the finest on the planet, appears to be evaporating in a series of pathetic little fizzles, in the private sector at least.
But, at least one battle-hardened veteran of the pension wars believes the end of the occupational DB scheme is far from inevitable. Indeed, Adrian Waddingham, senior partner at Barnett Waddingham, the UK’s largest independent firm of actuaries, is touting the early signs of a re-birth of a stripped down form of DB, without the “bells and whistles” to which it has become accustomed.
“I remain extremely bullish about pension provision. Pension plans, believe me, will come back. They won’t be in the form of old-style DB schemes, but they will be better than cheap and cheerful DC [defined contribution] schemes,” says Mr Waddingham, who has been involved in the pensions industry since 1971.
“There are still good employers around and they will find there is good business sense in doing well for their employees.
“It is only a matter of time before the government will say ‘you cannot get rid of people at 65’. Employers will have people who are 72 who they can’t get rid of, and who can’t afford to retire.
“Good employers will want those people to be able to leave. This is where the pressure will come from.”
Mr Waddingham tells the story of a US university that scrapped its DB scheme some years ago, but recently “noticed that its lecturing staff were not retiring”.
Fearing this would stymie new blood and new ideas, it started offering lecturers a gratuity equivalent to two years’ salary to retire, only for the university’s actuaries to warn it was making no provision for such payments and that it needed to start reserving against its promises, effectively re- establishing a form of DB scheme by the back door.
“An employer found themselves reinventing a new form of DB for different reasons. That was driven by business needs and the same will happen here [in the UK],” says Mr Waddingham.
“What I can’t tell you is if the new wave of pension schemes is two years away, or 12 years or even 22 years, but it will happen. People need help, particularly the low paid, to enable them to retire.”
He is confident similar stripped-down DB schemes – not as lucrative as the traditional model but superior to DC schemes such as the Personal Accounts due to be introduced in 2012 – would work in the UK if only legislation, such as that enforcing compulsory inflation indexing of pension benefits, was repealed.
“My point to government is if we could just unlock this middle ground we can still do a decent scheme for a 5 per cent employee contribution and 10 per cent employer contribution that would provide a career average scheme of 1 per cent a year, but without compulsory increases.
“Therefore after 30 years you would get a pension of 30 per cent of your career average salary. That is infinitely better than a Personal Account. But that scheme would be illegal.”
Indeed Mr Waddingham, who has advised on pension schemes from Malaysia to Fiji, is highly critical of the tide of UK pension legislation since 1997.
In particular he singles out the introduction of compulsory indexing, which “doubled the cost of pension provision”, and a 2003 law that enshrined a pension deficit as a legal obligation, rather than a problem a company must make its “best efforts” to solve.
“It’s extremely sad. Governments have not been kind to the sponsors of pension funds. We have moved from British pension provision being the envy of Europe to the present position where schemes are closing every day. The burden has become too great.
“It is the law of unintended consequences. Until 2003, arguably more people were better off when more employers tried to provide better pensions. The consequence [of the legislation] is that fewer people are getting good pensions. I think the unions would accept that off the record.
“The truth is that you can either have a good pension or a guaranteed pension, but you can’t have both.”
To illustrate his point, Mr Waddingham cites the celebrated case of Allied Steel & Wire, many of whose workers lost their entire pension savings when the company went into liquidation in 2002, despite the scheme being reasonably well funded.
“Why did they get nothing when the scheme was 90 per cent funded? It was because of government regulation. They said when a pension scheme hits trouble they must provide benefits to [existing] pensioners, so 1,000 retired people got 100 per cent and 100 people got nothing, when all 1100 could have got 90 per cent of their pension.”
Mr Waddingham is particularly scathing about Personal Accounts. A cynic might suggest an actuary is bound to oppose any move towards DC, given that such vehicles have little need for actuarial services, and Mr Waddingham admits he is perceived as a “vested interest” by ministers. Nevertheless, he fears for the future of workers in a DC-dominated world.
“More people have lost more pension in DC schemes than DB schemes in the last 10 years and there is no political issue,” he says. “A man retiring from a DC scheme in 2006 got only 24 per cent of what a man retiring in 1996 got for an identical contribution record and here is the government moving the whole nation into DC pension schemes.
“There will be another horrendous stock market crash and can you imagine the political consequences when the average worker has £50,000 in a pension pot one day and £30,000 the next day? I don’t think [politicians] have thought ahead.
“The people who will suffer will be those on low earnings. It is criminal to force low earners into that scheme. It’s sole purpose will be to reduce means-tested benefits.”
For the full article on the FT website please click here