If I asked ten people on the street how long they thought pensions had existed what do you think they would say? Since the 60’s, the formation of the state, Victorian times, or longer? You might be surprised to find out that pensions have been around since the year 13 BC, when the first Roman Emperor Augustus Caesar established a pension which granted a lump sum payment of thirteen times a Legionnaire’s salary to those who had served a minimum of twenty years in his forces. Some speculate that the reason he did this was to quell possible revolt by retired soldiers. Nineteen years later in 6 AD Augustus even had the foresight to set up a fund called the aerarium militare to meet future liabilities. Today, this arrangement would be called a non-contributory funded defined benefit scheme.
Perhaps indicative of future problems with this type of structure was the fact that Augustus’ scheme contributed substantially to military spending which became one of the many reasons for the fall of the Roman Empire. Despite being part of a modern workers remuneration package it has been decreed that a defined benefit pension is a promise, not an obligation of the employer, and that this promise can be broken without consequence. If the employer hasn’t the will or, in the case of the Roman Empire, the ability to meet shortfalls in funding, the scheme creates only the illusion of security in retirement. Although well capitalised at the start, Augustus’ scheme necessitated the creation of new taxes which weren’t popular.
While pensions have become somewhat more complex since Roman times, the principles are largely the same. The twenty years of service required to maximise the member’s lump sum hasn’t changed since the reign of Augustus but a multiple of thirteen times final salary may have been overgenerous for the time that was in it. Augustus may have over promised because he projected that the percentage of workers who would collect such a benefit would be low, in such a dangerous occupation. Indeed, greater than anticipated longevity has proved to be part of the undoing of modern defined benefit schemes too, as life expectancies have increased in recent times due to advancements in medical science, thereby putting a strain on scheme resources.
Today’s retirees receive a lump sum at retirement equivalent to only one and a half times their final remuneration; not enough to motivate one to carry out the duties of a Centurion but a valuable staff retention tool nonetheless. Paying it all at the point of retirement may have been somewhat open-handed of Augustus, but necessary perhaps when trying to prevent a coup. I regularly see the disappointment in a client’s face when they are told that they have to place a portion of their pension in an Approved Minimum Retirement Fund from which withdrawals are restricted for a period of time – I’m not sure if I would like to deliver that news to a heavily armed Centurion during his break from killing Christians in the Colosseum.
Two thousand years later we are still trying to design the perfect pension scheme. Like the Roman Legionnaires our public servants are well catered for; less so for the general populace (as was the case in Roman times). Defined benefit schemes are in decline, having become too big a draw on funds in recent years and the very generous tax relief on offer to savers in defined contribution schemes hasn’t enticed enough people to defer enough consumption to provide a replacement income for when their earned income ceases. Given our unsustainable state pension, plans have been afoot for several years now to introduce auto enrolment but much remains to be decided in relation to how that will operate and the effects of the global pandemic on employers will surely slow down progress.
If and when auto enrolment does happen, under current proposals it will start with a combined worker and employer contribution of only 3% of qualifying earnings each year, rising to 12% after nine years. As such it is only likely to be part of the solution for younger workers who have time on their side. It won’t be sufficient to bridge the pension gap for most older workers, many of whom will be approaching retirement by the time it is fully operational.
Having been classified as a promise, the die has been cast regarding the demise of defined benefit schemes. Going forward they would be largely impractical anyway given modern worker mobility but for many workers of a certain age, they form a sizeable part of their retirement planning provision.
Nobody can force employers to maintain the funding of the schemes which remain and whose (mainly older) members won’t have time to make alternative retirement provision.
What might help would be if any government supports which are granted to large companies in response to the pandemic could be made conditional on undertakings from them to keep their defined benefit promise. Never waste a good crisis as they say.
Eoghan Gavigan is a Certified Financial Planner and is the owner of BestPensionAdvice.ie.