David Davison explores the extras you could be paying if you're a charity worker in a multi-employer defined benefit pension scheme.
Standing in a queue at a well known coffee chain this morning with all the other ‘red-eye’ zombies waiting on their first caffeine fix of the day before boarding a flight, I witnessed an event which made me think.
The gent in front of me at the till, having entertainingly wrestled with his suit jacket, for what seemed like ages, looking for change, realised he was a few pence short of what was needed for his coffee. Rather than see him suffer the caffeine withdrawal any longer another individual in the queue stumped up the difference. After some polite thank-yous they both headed off to their gates.
This left me with a warm fuzzy feeling (or was that the hot chocolate?) about the warmth of humanity at such an ungodly hour. But was this a wholly charitable act? Well I suppose so, although possibly limited to some extent as I suspect it may also have been driven to some degree by expediency – namely he just wanted to make sure he didn’t miss his flight.
Now this got me thinking – how far would someone be prepared to go in displaying their generosity of spirit to a stranger? A few pence, a pound, a full skinny caramel macchiato? And would this be influenced by the surroundings - namely if there wasn’t a queue!
Now, in the UK we are rightly regarded as a very generous race but I suspect that most people might baulk at paying for the whole coffee and certainly would if they were also paying for coffee for his family. I’m pretty certain that they’d draw the line pretty firmly if asked to stand guarantor over his mortgage or to settle some outstanding debts for his ancestors.
Yet pretty much this is what people in the charitable sector are asked to do with their pension benefits every day. A lot of people in the sector participate in multi-employer defined benefit pension arrangements where cross payments and subsidies abound. There are three main types of cross-subsidy:-
1. The age subsidy. The cost to buy defined benefit pensions increases with age and yet the contribution paid by employers and employees is generally consistent for each member. This means that effectively older members are under-paying for their benefits while younger members over-pay. The quid pro quo for this inequity is that at some point in the future the younger members will be older and therefore will benefit from the cross-subsidy. But in the current climate where schemes are closing to accrual or members are exiting from schemes will this actually happen? Without the turnover of staff the whole concept falls.
2. The inter-generational subsidy. The expected cost of providing defined benefit pensions has increased consistently over recent decades. Longer life expectancy and lower investment returns have increased funding costs. This has meant that the contributions being made in the past weren’t sufficient for the benefits being paid now. Problem is you can’t go back to those who have retired or those who have left the scheme and tell them they didn’t pay enough and demand more. You have to generate the extra contributions needed from the employer and existing active members so current members are effectively funding their former colleagues.
3. The failure subsidy. Pensions, we are constantly told, are long term investments. Things will inevitably change over time. So what happens if an organisation fails and is unable to pay what it owes to the scheme? In a last man standing arrangement this shortfall or ‘orphan debt’ needs to get picked up by all the other organisations still participating. It’s not uncommon to see orphan debt levels in excess of 10 per cent of liabilities meaning that organisations can be paying £1 to a totally unconnected organisation for every £9 they pay for their own staff.
So the next time you feel overwhelmed by the milk of human kindness make sure you know how many people you’re buying coffee for!