Workplace pensions: how to stop bosses ruining our pensions

The Government is threatening prison sentences, but a more nuanced approach may be more effective.

The Government is talking a tough game on bosses being ‘reckless’ with their employees’ pensions.

This week Amber Rudd, the Secretary of State for Work and Pensions, unveiled a crackdown on bosses that are “playing fast and loose” with their staff’s savings, but who receive little more than a slap on the wrist when they are caught.

As a result, the Government wants to make ‘wilful or reckless behaviour relating to a pension scheme’ a criminal offence, carrying with it a prison sentence of up to seven years, or an unlimited fine.

The move follows a series of high-profile pension scandals at firms like BHS and Carillion.

However, there has been a suggestion that there is a far simpler method which would mean bosses took a more responsible approach with their employee’s pension funds, and which wouldn’t need to involve the judicial system at all.

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Force them to save with you

Researchers at Warwick Business School reckon that a better approach would be to force bosses to save within the exact same pension schemes as their employees.

They noted that in the case of Carillion, the pension scheme for staff – which as a defined benefit scheme was supposed to provide them with a guaranteed income in retirement – was almost £1 billion in deficit when the firm hit the wall.

As a result, the tens of thousands of staff will be losing out on at least 10% of the payments they expected each year.

Yet the directors of the firm are not suffering the same way, as they were members of a separate pension scheme which had no such funding issues.

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Do as I say, not as I do

The researchers looked at more than 300 publicly-listed firms that had offered Defined Benefit schemes between 1999 and 2013.

During this period, 74 schemes were fully closed, while another 156 partially closed their schemes, pushing staff towards Defined Contribution pension schemes instead.

They found that chief executives were 77% less likely to close its main Defined Benefit scheme if they were a member and trustee of the plan, no matter whether the scheme was in the black or the red.

But if the chief exec’s pension plan was somewhere else, they were far more quick to close the door, whether partially or in full.

There is an element of common sense to this of course.

A boss is obviously going to think a bit longer about closing a pension scheme if they have some skin in the game.

Similarly, they are more likely to ensure that it is properly funded if it is potentially their pension at stake, as well as those of their staff.

There’s a benefit to bosses too

Obviously, most bosses are going to be keen for any alternative measure that doesn’t involve a potential prison sentence, but there is an added bonus to consider if they do go down the route of saving for their retirement alongside their employees.

The researchers found that when the chief executive is a member of a defined-benefit scheme, and that scheme falls into debt, it has less of a negative impact on the firm’s credit rating than when the boss is saving for their pension elsewhere.

The researchers point out that this may be down to credit rating agencies recognising that the bosses have a stake in making sure the pension plan is sustainable. But for bosses, it also means that they will find it easier to access funding.

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A more nuanced approach

There’s something very simple about the Government’s idea of sending these ‘reckless’ bosses to prison, and on one level that is quite appealing. But just because it is simple doesn’t mean it will actually be effective.

I much prefer the suggestion from the Warwick Business School, because it is pushing bosses to do the right thing by tapping into their own (inevitable) self-interest, rather than making big sounding threats which may fail to actually materialise.

Besides, if a reckless boss messes up a pension plan and goes to jail, there will still be innocent savers who miss out on what they had expected to receive.

At least with this more nuanced approach, there is the chance to cut that out entirely.