Captain of industry

This is a great time to be doing my job,” admits Jim Bligh, who took over from Neil Carberry as principal policy adviser for employment relations and pensions at the Confederation of British Industry in February. With pensions topping the news agenda on a regular basis these days, it is easy to see why. A flat rate pension, auto-enrolment, Nest, age discrimination and Solvency II are all potential drains on corporate profitability. Which is why it is Bligh’s job to make them as streamlined as possible.

Mention the issue of public sector pensions and you can see the blood quickening in Bligh’s veins. Far from being a matter just between government and the taxpayer, the CBI sees this issue as of crucial importance for the entire economy.

“There are two big reasons why we are so passionate about this: firstly the government’s priority absolutely must be paying down the deficit, and it must also be to secure private sector growth.

“The issue of the deficit is one that is fundamentally wrapped in with public sector pensions. It cannot be right that the public sector goes on clearing the pensions it does which currently has a total liability in excess of £1trn. And it cannot be right that there is an annual shortfall of £10bn between the amount of money that the government gets from employers in contributions and the benefits that are accrued each year. £29bn is accrued and £19bn goes in. This is not sustainable.

“The second reason is we have to have a level playing field between public and private sectors, specially when it comes to public services outsourcing and contracting. This is particularly relevant in TUPE situations. If you transfer some workers over from the public sector into your organisation you are obliged under private sector funding rules to pay the same pension that they received under public sector pension rules. This whacks up the cost and is a deterrent for small employers and third sector organisations tendering for public services contracts.

“What I don’t understand is how the trade unions see this issue as being so politically unpalatable when 20 years ago trade unions in Sweden and Holland accepted far more radical and wide-ranging reforms to their public sector pensions in the interests of the public finances, which were in no way as bad as they are in the UK now,” says Bligh.

“At the moment civil servants can pay as low as 0.5 per cent of salary and the employer pays 19.5 per cent, so contributions do have to go up. Unions are not being fully straightforward about what the truth is here.

“But we are in a very different situation from 1984 or 1979. In 1984 we lost 27 million working days to strike action. Last year it was less than 1 million,” he says.
When it comes to pension minister Steve Webb’s plan for a flat rate pension and the abolition of contracting out, the CBI is in complete support, but with one big, non-negotiable condition.

“We are in a very different situation from 1984 or 1979. In 1984 we lost 27 million working days to strike action. Last year it was less than 1 million…”

“It is much better to have a simple pension that everybody understands. But there is one big issue that our support is completely dependent on. The second option proposed by Webb involves the abolition of contracting out rebates. We have no problem in principle if it is cost neutral to employers, employees and government. So we propose a simple statutory override that would allow schemes to reduce their accrual rate without affecting the total amount of take-home money that employees get when they retire. It is a very simple fix, but they have got to fix it,”

So what is the priority for the CBI when it comes to auto-enrolment? “The government was right to commission Paul Johnson to review the previous government’s plans. If they had gone through as they stood then the reforms would have been unworkable. The Pensions Bill going through Parliament is hugely important as it will tell employers what they need to know and how they can keep their high-quality schemes going without levelling down to the statutory minimum.”

Bligh says the CBI is happy with the way the Bill looks at the moment, but does not want the government backtracking on anything.

“It looks very good, but we don’t want any watering down when it goes back for a second reading. Most important for us at a strategic level in the Pensions Bill is the retirement age issue. Raising the state pension age to 66 has to happen. Second most important on pensions is self-certification and making sure that your existing provision is suitable for post-2012. We lobbied hard for years and years for this.”

Two years ago defined benefit pension liabilities, and in particular the PPF levy and recovery plans were the biggest issue facing Britain’s boardrooms. Bligh says not surprisingly these issues have receded somewhat as markets have bounced back.

“Lets not forget it was a huge issue because companies have these huge toxic defined benefit schemes and the deficits are often valued at the lowest point in the recession. Some employers were paying a fortune in PPF levy and they were concerned about the viability of their company.

“The problem still exists but for companies that are recovering it is less of a problem than it was. The new PPF formula will be better for most companies because it is more stable and predictable. Some companies will lose out there in that they will pay more, but it is more stable.”

So while the PPF levy was the big challenge for employers a couple of years ago, Bligh believes changes emanating from Brussels will create bigger challenges in 2012.

“Solvency II is an enormous threat coming on the horizon in 2012. Defined benefit schemes will have to have considerably more money in the pot than they ever needed before. And it is just not necessary in the UK. Here we have a very good system of protection, with the regulator and the Pension Protection Fund. We have a really heavy infrastructure that already does the job that the directive wants to do. So the UK does not need this additional regulation and at the same time it will cost employers billions of pounds to make sure their schemes are above the funding level.

“European states have got different systems and different regulatory architecture so it is very hard to have a one-sizefits-all regulatory solution”

“Part of the problems is that all European states have got different systems and different regulatory architecture so it is very hard to have a one-size-fits-all regulatory solution.”

In light of this, and the recent gender underwriting decision in the European Court of Justice, does Bligh see any positives for the financial services community in coming out of our membership of the EU?

“Mobility of staff about Europe is becoming an increasing issue, with the UK exporting 2 million workers to European Union and member states doing the same back,” says Bligh.

“But we have got to be cautious. We are working with Business Europe, which operated with other organisations from other member states, to tell the EU that they have got to limit what they are doing.”

Asked about CBI director general John Cridland’s recent comments that Nest was too expensive, Bligh plays down their significance, but points out there is a genuine issue behind them.

“This is not a massive issue for us, but our line has always being clear. Lord Turner said it should be 0.3 per cent. He said if you look at the examples of other countries, it could even be lower than that – look at Denmark or New Zealand. And then we look at what the private sector can deliver. Years ago the private sector said it would deliver at 0.7 or 0.8 per cent. That is not cheap enough. But we know that even on an individual basis the private sector can provide as low as 0.6 per cent, including investment charges.

“Nest is charging 0.47 per cent which is considerably higher than the charges envisaged by Turner and higher than the consensus that was agreed shortly after the Turner commission. What we are saying is the Treasury should be less stingy on its loan. It is going to be a very big scheme with between 5 and 9 million members, and we believe it can offer a cheaper scheme,” says Bligh.

But that is not to say the CBI questions Nest’s chances of success. Quite the contrary.

“No doubt about it, Nest is a good thing. It will be a well-run scheme and it will work. We have absolutely no question in our support for Nest. On the other hand we think government should treat it with a slightly lighter touch.” He says.

Bligh does not believe the regulator is going to be spending its time hassling decent employers trying to do the right thing over whether they have fulfilled their auto-enrolment obligations down to the last penny. And although auto-enrolment is onerous on employers, they will in time see it as just another thing they have to deal with.

“This is a huge new role for the Pensions Regulator that is much, much bigger and very different from what it was doing before. It must not fall into the trap of over regulating.

So with Cridland stating Nest is too expensive, is the CBI behind the work done by David Pitt-Watson of Hermes who has been carrying the banner for industry-wide collective DC schemes on a Dutch model that aim to strip more cost out of the pensions process?

“We have studied neutrality on this. We think it is a very valuable discussion and we fed into it. People want a more stable to see solution.

“But it is the overall package that comes with it that is going to be more important going forward. We are going to see more early access to savings wrappers. It might be 8 per cent in your pension and 3 per cent for your mortgage.

“Life is a lot more expensive for people in their 20s than it was 10 years ago when parents could provide. We want to have a far more flexible service package. Will you get that the collective DC? I am not sure. So what is the interest for the new generation of workers? And crucially for employers, what is the reward for the FD?

“I think they want a reward package that does what defined benefit did for them and collective DC does not necessarily do that for them,” he says.

And what do FDs see as offering staff something as engaging as what DB did in the past?

“It cannot be right that there is an annual shortfall of £10bn between the amount of money that the government gets from employers in contributions and the benefits that are accrued each year. £29bn is accrued and £19bn goes in. This is not sustainable”

“They want more flexibility for workers and for themselves and they want to make sure people are able to be motivated to stay with them with a decent package on top of their salary,” he says, adding that corporate wrap meets many of the requirements of what employers want in this regard.

The removal of the default retirement age is another issue creating headaches for employers, and Bligh wants to see some creative thinking from government in how employers and their staff can work together to create an exit strategy without ending up in an employment tribunal.

“Trying to work out what you can do for your ageing workforce with dignity is a huge problem. And government has failed to step up to the plate. It has failed to provide guidance on employer-justify retirement ages, and it has failed to provide what we have called for, which is a practical workable solution whereby employers and employees should be able to have protected conversations with each other. They should be able to talk to each other in the privacy of a room to ask staff ’what are your plans to retire, because you are approaching 65, and how long are you thinking of working on?’ At the moment you can be taken to tribunal for age discrimination for asking that, and that is not on. We have called for it and we have called for it and government has still not provided the answer,” says Bligh.

Bligh rejects suggestions such a conversation would intimidate some elderly staff who would feel pressurised into leaving. “These are things they want to know as well. They want to plan for their own retirement. And they want to be able to go to the workforce, to the boss, without the boss thinking they are incapable of doing the job,” he says.

With the Retail Distribution Review just around the corner, does Bligh think employers are ready for the way the access to intermediary services may be more limited in future?

“We need transparency of costs in pensions but also there needs to be an expectation that individuals do need advice and will need advice if they are being automatically enrolled for the first time into a pension from next year. So there are issues of concern for the industry and employers but I think it is one for the market to develop a way forward.”