Video transcript: What is the right answer for pension provision in the UK?

Transcript

Jonathon Land: Hello, I'm Jonathon Land, a partner in our employer covenant and restructuring practice. I've been advising pension schemes for the last 20 years and I'm really fascinated by what makes a high performing trustee board. I've seen very large boards, small ones and very different compositions. So I'm delighted today to be joined by David Davies. David spent his whole career in the insurance industry before moving to become the chair of both the Nortel and the Co-op pension schemes. So, David, what do you think makes a high performing trustee board?

David Davies: Well, I was lucky. I cut my teeth as deputy chair of the BT scheme and I learned a lot in that process. When I became chair of Nortel, it was just immediately prior to it going into administration and that put this whole scheme under an awful lot of pressure. So I've had different sizes of boards and clearly some boards were too big. Some were a bit small. I like a size somewhere between 5 and 10 with a range of skills and expertise, commitment and engagement. And I'm a great fan of MNTs because, particularly when Nortel went into administration, the MNTs who had some skin in the game were very, very much part of the whole process of wanting to get the best for the members.

Jonathon: Yeah, I think that's really interesting. I think observations on size and the member nominated trustee role, really interesting.

Two fascinating schemes - Nortel and Co-op. What did you learn through that process that you want to pass on to others?

David: Well, now particularly you have to look back at history because almost certainly things will have been the same some years back. You know, I lived through the 70s when inflation was rocketing high and people have now adjusted to that these days. But I also learned that once the scheme has a poor or weak covenant, you're in a position where you can trust nobody. You really have to negotiate hard with the employer. You really have to be sure that you act almost as a bank manager to the employer. You've made the employer a loan and you want that loan to come back to the scheme at some stage. So, somehow, you've got to make sure the employer does the decent, honourable thing.

Jonathon: Fascinating that perspective there regarding the employer.

Future pension provision in the UK is a question that many people are wrestling with. Last week, I had separate dinners - one with the CEOs of the major DB schemes in the UK, and interesting them now looking at end game strategies, and then also dinner with the CEOs of a number of large DC master trusts, and there they are seeing very substantial inflows of money, some as much as half a billion pounds a month. What do you think is the right answer for pension provision in the UK?

David: Hmm, If I knew the answer to that, I'd be a wealthy man. But let's start. I’m in favour of a hybrid scheme. 3 layers. One is the basic state pension, which I’d like to be somewhere proportionate to average earnings. Secondly, on top of that, I'm a fan of defined benefit schemes. The problem is that they aren't affordable, particularly with the rise in pensionable earnings. So I'd try to find a way of curtailing the cost of defined benefit by adjusting the definition of pensionable earnings so it doesn't get out of hand. So I’d provide, let's say, one and a half times average earnings to each and every member and, on top of that, a defined contribution layer where senior employees, those who are paid way more than average earnings, can contribute and can get some return back. That way, I think schemes will be affordable to employers, and not like in today's terms where private schemes and the public schemes are almost unaffordable.

Jonathon: I think that's a fascinating answer - the combination of DC but also protecting those lower paid people with a level of DB that takes them out of the poverty trap and procures the level of pension for the future.

If I'm asking a question to a future chair of trustees, is there a question you think I should ask them?

David: Ohh, well, firstly, what keeps them awake at night with regards to the scheme and what are they doing about it? And secondly, would they be happy to put their assets and their pension arrangements into the scheme, particularly one that's in a weak position? And if not, why not?

Jonathon: Good question. Well, thank you, David. I think those are some fascinating insights from your career associated with the pensions industry. And thank you all for listening. I hope you found that useful and I look forward to sharing the next live stream with you when I interview another chair and ask David's question to them. Thank you.