Pensions, pensions, pensions by Charles Cotton

There have been a number of pension and retirement consultations over the past few months. In our responses it has been useful to refer to the research that we did last year with BlackRock around the private sector Business case for pensions Those firms that did contribute to their staff retirement cited recruitment and retention as reasons for doing so. In the public sector, these arguments have also been reported by employers as to why they provide their defined benefit pensions. Yet have the arguments for occupational pensions changed much over time?

Back in the early 1800s, the philosopher, Jeremy Bentham, looked at the rationale for providing a pension, though at the time he was writing pensions were almost exclusively a public sector phenomenon (rather like final salary pensions now).

His first argument for providing a pension was that as employees got older they tended to become less able to work. However, this period coincided when they needed their income more and so without a pension they would have to keep on working when they may not be physically or mentally able to do so. A pension would allow employers to manage their workforce by providing an income that would allow those unable to perform to stop work.

In Bentham’s own words: “There are many cases in which it is not desirable that a public functionary should continue to be employed after his activity and capacity have become impaired. But, since the infirmities of age tend to increase his wants, this is not the time in which he will be able to retrench his expenditure; and he will be induced by this consideration, in his old age and impotency, to continue to endeavour to perform, with pain, and even with disgrace, the duties of a station which, in his maturity, he had filled with pleasure and reputation. To wait till he voluntarily resigns, is to expect a species of suicide; to dismiss him without a pension of retreat is, in the supposed state of his faculties, a species of homicide. A pension of retreat removes all these difficulties: it is a debt of humanity paid by the public to its servants.”

The next argument was that as a pension was deferred pay, the state would be able to pay employees a lower wage as a result and, hopefully, would not have to pay out too much in retirement due to them passing away.

“By means of these pensions, the scale of all salaries may be lower than otherwise, without producing any ill effect upon the quality of the services rendered. They will constitute an item in the calculation which every individual makes : in the mean time, government will obtain from all, at a low price, services, the ulterior compensation for which, on account of the casualties of human life, will only be received by a few. It is a lottery, in which there are no blanks.”

Since Bentham wrote these words, more public sector employees (as well as their private sector counterparts) can expect to look forward to more years in retirement than Bentham could have probably have imagined. This is one of the reasons for the demise of DB pensions in the private sector and one of the reasons why the affordability of public sector pensions is under such scrutiny.

Bentham also saw pensions as a way of preventing employee fraud, if staff stole from their employer than their pension was forfeit. It would be interesting to speculate how City directors would have behaved if their pensions had been at risk as well as their bonuses and shares, it may have helped focus attention on risk as well as reward.

“In all employments from which the individuals are removable at pleasure, the pension of retreat, in consequence of the approach of the period at which it will become necessary or due, will add an increasing value to the salary, and augment the responsibility of the individual employed. Should he be tempted to malversation, it will be necessary that the profit derivable from his malversation should compensate with certainty not only for the loss of his annual salary, but also the value of his future pension of retreat; his fidelity is thus secured to the last moment of his continuing in office.”

Finally, Bentham touches on that providing a pension may help foster employee engagement because individuals don’t have to worry as much about the financial consequence of growing old, they can focus on their work and be more effective. Also, because they may be more likely to stay with the same employer for longer, this could have a positive impact on the quality of that organisation’s workforce.

“We ought not to forget the happiness, insured to the persons employed, resulting from the security given to them by the provision thus made against that period of life, which is most menaced with weakness and neglect. Hence an habitual disposition to perform the duties of their office with alacrity will arise; they will consider themselves as permanently provided for, and fixed in a situation in which all their faculties may be applied to the discharge of its duties, without being turned aside by vague apprehensions of future distress, and the desire of improving their condition, which so often leads individuals successively to try different stations. Another advantage to the government; instead of being badly served by novices, it will possess a body of experienced functionaries, expert and worthy of its confidence.”

So, the current rationale for pensions is not too dissimilar to that of two centuries ago. However, back then, pensions were also seen as an employer benefit as a way of helping organisations manage their workforce. Nowadays, our research appears to indicate that pensions are primarily seen as an employee benefit, something you need to offer to attract and retain employees but not as an integral part of a talent management strategy. As the DRA is abolished, employers will need to consider once again how their pension plan supports their human capital strategy.