Occupational Pensions
Introduction
Planning for the old age has been one of the worries of most individuals, more especially the employed. One of the elements of this planning is the pension. Generally, pension is an arrangement to provide individuals with earnings at the time when the have ceased getting regular employment income. It serves the same purpose as severance pay, but while pensions are paid in regular installments, severance pay is paid in lump sum. Pension awarded following retirement is commonly known as a retirement plan, (Ginn, 2003). These plans may be established by either, the government, insurance companies, employer or other institutions such as trade unions. Different terms are used to refer to this plan in different countries. While in the United Kingdom it is referred to as “pension schemes”, in the United States it is commonly known as “retirement plan”, and “superannuation plans” in Ireland, (Turner, 2006). An occupational pension is retirement plan that is mostly established by employers for their employees. These kinds of pensions are usually seen to be some kind of deferred compensation that is beneficial to both the employer and the employees for tax reasons. This paper will be seeking to answer the question “Is there a future for occupational pensions, and how will they change?” In order to answer this question, various issues concerning occupational pensions will be discussed, such as the types of occupation pensions, advantages and disadvantages of occupational pensions, current state of these pensions, future state of the pension, and then finally the conclusion on the same issue.
Types of occupational pensions
There are various types of occupational pensions, depending on the rules and regulations governing the same in the various countries. However, occupational pensions can be broadly classified into three categories. The first category is non-contributory occupation pension schemes. In this case, all the contributions are made by the employers for their employees under the scheme. The second category is the contributory occupational pension schemes. Under this type of pension schemes, in addition to the contributions of the employers for their employees, the employees are also required to contribute a certain percentage of their earnings, (Jackson, 2006). The income of the employee on maturity of the scheme will depend on the contributions made by the employer, the growth rate of the pension fund, as well as the annuity rates at the retirement period. The last category is open “stakeholder” schemes. Unlike the other two schemes, the employer does not contribute in this scheme. In the United Kingdom, it is a law for any organization with more than five employees to establish this plan. However, it is not a requirement of the law for the employers to contribute to this scheme, (Barr and Diamond, 2006).
Advantages of occupational pensions
There are various advantages that can be attained by both the employers and the employees through occupational pensions. One of these advantages is tax relief for employees’ and employer’s contributions for Customs approved and HR revenues schemes, which are given within annual allowances. From the employees’ point of view, it is an opportunity to plan for the future at the time of old age. Precisely, occupational pension schemes can be considered as a saving plan for the old age. Another advantage that may be attained by the employees is the additional benefits associated with this scheme. For instance, in some cases, if a member dies pension may be paid to the partner, (Ginn, 2003).
From the employer’s point of view, occupational pension scheme is one of the strategies of attracting, retaining as well as motivating employees. To some degree, occupational pension schemes contribute to job satisfaction which in turn contributes to production efficiency among the employees. Another thing is that, these schemes are usually designed as well as controlled according to the desires of the employer, but within given legislative limits. Thus, it is easy for the employer to structure this scheme to suit his/her business objectives, (Jackson, 2006).
Disadvantages of occupational pensions
Besides their advantages, occupational pension schemes have also their disadvantages. For instance, there is some rigidity in the operation of these schemes in the sense that, it becomes challenging to contribute to these schemes when one switches employers. Another disadvantage is that, under complex government legislation, the employers are forced to shoulder some costs that are associated with the provision of occupational pension schemes, (Turner, 2006).
Current state of occupational pensions
In almost all countries, occupational pensions are usually undertaken according to rules and regulations that have been set by the government. In the United States, the Pension and Welfare Benefits Administration (PWBA) under the Department of Labour, has been given the mandate by the federal government to administer regulations of pensions, (Ambachtsheer, 2007). The main objective of these regulations is to ensure that the interests of the parties as well as their beneficiaries are protected in these schemes and setting standards that must be adhered to by pension schemes.
Currently, there are various challenges facing not only occupational pensions but also other forms of pension schemes. The first challenge is population aging. In most countries, the ratio between the elderly and the working population is increasing at a high rate. This can be explained by the decreasing birth rates and increasing life expectancy, leading to an increase of the number of the elderly in comparison to the working population, (Ambachtsheer, 2007). Thus, the demand for retirement benefits has increased considerably more than the available sources of funds from employer and employee contributions. Perhaps, there are three alternatives in which this situation may be handled; increasing taxes to pay pension schemes, increasing pensionable ages, or lowering pensions in relation to society-wide average earnings. This implies that, not unless necessary measures are undertaken, pension schemes might collapse in the future.
The other challenge is the increasing tendency of business organizations, more especially in the United States, deliberately under-funding occupation schemes so as to transfer the costs to the government. Additionally, under-funding of these schemes also implies that these organizations are entitled to a certain amount of tax-allowances, which leads to a decline of government revenues. This is one of the reasons behind the increasing pension liabilities which are being faced by the government in the United States, (Ambachtsheer, 2007).
Inflation is yet another challenge that is affecting the current occupation pension schemes. These schemes are exposed to increasing inflation as they are paying inflation-linked pensions. The situation has been deteriorated further with the recent economic crisis which affected almost every economy in the entire globe. Ideally, occupational schemes have been hedging by buying index-bonds, (Ros, 2010). To deal with inflation, the schemes are forced to expand their investments on liability bonds in addition to index-linked bonds. However, with the increasing inflation levels, secure supply of physical linkers is invaluable.
It has been also noted that most companies, more especially in the United Kingdom, are changing their strategies on occupational pensions. In the past, based on the traditional schemes, commonly known as the “final salary” or “defined benefit”, organizations were setting aside funds for contribution to the pension schemes of their employees; however, this is not the case in the recent times. Instead, they have turned to schemes that besides their contributions, the employees are also required contribute some amounts as well, (Bridgen and Meyer, 2005). In these schemes are commonly described as “defined contribution” or “money purchase”, the employees only know what is paid in but they are not aware of what they will earn at the time of retirement. The main arguments that have been put forward for these changes is that; the traditional schemes are no longer applicable in the contemporary life style based on the assumption that people are likely to change employers, and the increasing life span forcing employers to contribute to the occupational pensions for a long time, (Barr, 2006).
Changing from traditional occupation pension schemes to the current schemes is considered as being a problem based on two main reasons. Firstly, it has been noted that employers are contributing a smaller percentage towards occupational pensions as compared to in the past, and the employees are paying more, (Jackson, 2006). Besides, it is expected that people will be forced to work up to the age of 72, to be in a position of earning the same benefits as those who were in the traditional schemes. This implies that if individual are not going to save more than those in the traditional occupational schemes, there are likely to make awkward choices; either to work for more years or retire at 65 and experience a remarkable decline in their income. Secondly, it has been forecasted that long-term stock market returns are likely to decline dramatically in the next few years. Despite of the recent economic crisis, returns from the stock market have been performing well in the past few decades. Based on this forecasts, it is expected that people will be forced to save harder for their future, (Turner, 2006).
The future of occupational pensions and what is likely to change
Perhaps, the issue of the future of occupation pensions can be best addressed based on the advantages and disadvantages of these schemes as well as the current challenges that are faced by the occupational pension schemes. In most countries, due to the costs that are involved in managing occupational pensions, governments have tried to pass on these costs onto the employers. However, as noted above, it has become very challenging for the employers to guarantee open-ended pension provision for their employees and a number of them are still yet to clear deficits in their final salary pension schemes, (Ginn, 2003). Following this challenges, future occupational schemes are likely to change considerably from the traditional schemes.
One of the likely scenarios is that the employees are like to be forced to part with a higher percentage of their salary, as contributions towards their occupational pension schemes. Already most countries in the globe have proposed changing of pension scheme regulations towards the same, (Field and Williams, 2009). For instance, various assessments have been undertaken in the United Kingdom and most of the reports indicate that increasing the percentage of employee contributions could be a viable option. According to the report of the Independent Public Service Pensions Commission, employee contributions towards occupational pensions should be increased by about three percent. However, within the public sector, the lower-paid workforce may not be required to part with much extra proportionately with higher earners, (Ros, 2010).
The structure of occupational pension schemes is changing following the changing conditions. For instance, in the context of the private sector, defined benefit schemes have been replaced by defined contribution, and this is expected to be the standard structure of future occupational pension schemes, (European Commission, 2004). Based on this defined benefit schemes, the employers the costs and risks of pensions are shouldered on the employer, who also takes the risks of salary inflation, regulatory changes, investment performance, interest rates, as well as longevity. However, with this new structure these risks are usually shared by the members, (Gruber, 2011). The employers are only accountable for a specified contribution, and no agreement or promise as to the amount of pension benefits an employee will be receiving following retirement. In the United Kingdom, the new regulations are likely to be implemented starting from 2012. An automatic enrolment system will be implemented at the national level, to ensure that employees are compulsorily selected into an occupational pension scheme. Employees above the age of 22 with an annual income of over 7,500 pounds will be forced to join pension schemes. The employer will be required to contribute 3%, the employees 4% and the state 1% in tax relief, (Field and Williams, 2009). The main objective of these regulations is to ensure to promote or rather encourage private pension arrangements for the employees. Introduction of such changes are likely to destroy the future occupational pensions for a number of individuals due to various reason, (Gruber, 2011). There are high chances that the employers may take advantage of these changes to reduce their contributions towards pension schemes.
Another way in which the occupational pension schemes are likely to change in the future is the change of the age at which people will be qualified for retirement benefits. It was mentioned previous that increasing life span has become a big challenge for occupational pension schemes in most countries. To deal with this challenge, proposals have been made for the retirement age to be increased, (Ros, 2010). Increasing the age of retirement has been ranked at the top among the pension experts in different countries. It is expected that this strategy will be effective in distributing benefits and costs equitably between generations. The assumption on this proposal is that it has a favorable effect on beneficiaries/contributors ratio. According to these experts, it is assumed that the strategy will stabilize the contribution rates due to participation of a higher labor force, and equally maintain relatively high levels of pension benefits for join the retired population, (Alberto and Kosik, 2009).
According to Mintel International Group Ltd (2006), besides the above factors that are likely to change in occupational pension schemes, there are also other indirect factors that are likely to change occupational pension scheme system. Some of these factors include reduction of expenditures by the government in other policy areas to channel the funds in financing occupational pension schemes and prioritizing fighting unemployment with an objective of increasing the number of contributors.
Conclusion
Providing adequate provisions for retirement is one of the challenges that are faced by most people. Occupational pension scheme becomes handy in addressing this problem. This is retirement plan that is mostly established by employers for their employees. It is usually seen as being some kind of deferred compensation that is beneficial to both the employer and the employees for tax reasons. The major objective of the paper was to address the question “Is there a future for occupational pensions, and how will they change?” In answering this question, the paper has been organized into various sections. First the current situation of occupational pension schemes in various parts of the globe was addressed. Under this section as noted above, there are various challenges that are facing occupational pension schemes. However, the most common challenges include the increasing life span which results to high ratio of beneficiaries to contributors, increasing rates of inflation which contributes to higher costs of managing these schemes, and changing of business strategies of the employer concerning these schemes. It has been noted that the future of occupational pensions and the way they may change will depend on how these challenges are addressed. In the United Kingdom, promoting private saving for retirement age is one of the policies that have been proposed to address these challenges. Policies that are likely to be implemented in the near future include increasing of the retirement age and changing of the structure of the occupational pension schemes. Thus, future occupational pension schemes are likely to take a different course as compared to what has been in existence.
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