Future Proofing Industry Pension Provision
Phil Boyle, Communications Director of the MNOPF and the Ensign Retirement Plan, takes a look at the reasons behind recent changes in the MNOPF and the growth of the Ensign Retirement Plan.
You will have read in last month’s Telegraph that the MNOPF Trustee had taken the decision to close the Fund to future DB accrual. In the pensions industry, we are good at making ourselves sound clever with our grand sounding terms, but perhaps we would benefit more from trying to explain things a bit more clearly. Your income is, after all, going to be very important to you in retirement, and we are working hard to make sure that the industry has the highest quality pension provision available.
So what is future DB accrual? DB stands for “Defined Benefit” and this is a type of pension based upon how long you have been contributing to the fund and how much you earn. Members and employers make contributions that are set at a level designed to ensure that there is enough money in the fund to provide the pension benefits when they need to be paid. If it becomes clear at a later date that there is not going to be enough money in the fund to meet the benefits that have already been promised, then the employers are asked to make additional contributions.
This can happen for many reasons, but probably the biggest factor is that we are all living longer than we used to! Contributions in 1970 would have been based on an average pension needing to be paid until age 78. Those members are now expected to live on average to age 88 and the extra ten years of pension payments were not built into the calculations of required contribution levels at the time.
We know now that our members will live much longer and we can factor this into the contribution calculations, however this does not make attractive reading for the employer or the employee. There were only 600 members still contributing to the MNOPF and their average age was quite high, meaning that current contributions would not be able to be invested for very long before the member retires. Calculations by the MNOPF’s actuary show that members would need to pay over 15% of their monthly salary in pension contributions in the future, with their employer paying over 25% every month. The MNOPF Trustee felt that this contribution level might make the scheme unaffordable for some members and decided to look at other options.
The solution that the Trustee proposed was to fix contributions at 30% of member’s salary (10% paid by the member and 20% by their employer), but it was clear that because this level would not be sufficient to deliver DB benefits, that these contributions would need to be invested in a different type of pension. The Trustee decided that if the proposal went ahead, the contributions would be made to the Ensign Retirement Plan (for the MNOPF). This would, however, only affect future contributions and benefits, which is what is meant by “future accrual”. The proposal was that all the benefits that members had earned up to 31 March 2016 would be be retained as DB benefits in the MNOPF, and would increase whilst the member was still contributing.
The proposed 30% contribution level was significant. Agreement from both members and their employers was required for the proposal to be implemented and for this reason, input was sought from the Joint Officers Pension Committee (JOPC) before the proposal was finalised. The JOPC is made up of representatives from the employers and from Nautilus International and Nautilus ensured that the final proposal contained a contribution rate that would provide an acceptable replacement for the benefits that member’s would otherwise have continued to earn in the MNOPF.
Christmas and the New Year was a busy time for our colleagues at Nautilus and the Ensign Pensions team as we worked to ensure that members had as much information as they needed during a consultation process with their employers. Whilst a majority of the members and employers were in favour of the proposal, all feedback received whether in support or opposition to the proposal was collated and passed to the Trustee to consider. This resulted in the February decision to proceed.
With the change taking place on 1April 2016, the race was quickly on to communicate with the employers and make arrangements to get everything set up to ensure that contributions could be made on time to the Ensign Retirement Plan (for the MNOPF).
We launched the Ensign Retirement Plan in July 2015. The Plan is a “Defined Contribution” (DC) pension scheme which means that all the contributions made in respect of a member are put in a pot specifically for that member and used to provide retirement benefits. The Ensign Retirement Plan was introduced to take advantage of recent developments in pensions that allow members more flexibility over how they can take their benefits (buy a pension, take the pot as cash or use it like a bank account and draw out money as and when required). The Plan was established with the aim of providing an industry scheme that could be used by any employer for any employee and like the MNOPF is run by a trustee board comprising of employer and Nautilus International representatives. The scheme has low charges and meets the pensions industry standards for a high quality pension scheme. We believe that many employers will find it much easier and cheaper to use the Ensign Retirement Plan than to run their own pension schemes and the Merchant Navy Officers Pension Plan (MNOPP) quickly took the decision that it was in their member’s interests to close MNOPP and transfer their retirement pots and contributions to the Ensign Retirement Plan.
A replica of the Ensign Retirement Plan, called the Ensign Retirement Plan (for the MNOPF), was created within the MNOPF to allow MNOPF employers to put new members into the Fund and it is this scheme that the MNOPF Trustee decided to use for the future contributions from 1April 2016. The contribution levels that will be made in respect of the members joining from the DB section of MNOPF are very generous compared to most DC pensions. The base contribution level for employers who join the Ensign Retirement Plan is 10% of salary (4% paid by the member and 6% from the employer) and although some employers and their members pay as much as 18% of salary, the 30% level that will be paid in respect of these MNOPF members means their retirement pots will grow more quickly and boosts their ability to secure good levels of retirement benefit.
We think that the future will be a bright one for the Ensign Retirement Plan. We hope that many of the employers who are using the Ensign Retirement Plan (for the MNOPF) for their contributing MNOPF members will also consider putting other employees into the Plan or using the Plan to replace in-house pension schemes. We also hope that the growth of the Plan will persuade other employers to look at the merits of using an industry scheme to provide high quality retirement benefits for their employees.