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Ros Altmann: Funeral rites for the final salary pensions
PRIVATE sector final salary pension schemes are finished – employers cannot cope with the costs and risks, but public sector schemes remain underwritten by the taxpayer.
Another watershed week for UK final salary pensions has been overshadowed by the chaos at the heart of the Brown Government. If anyone was still in doubt as to whether these schemes had a viable future, the latest announcements should have removed the uncertainty.
We really need a national strategy for managing this fundamental shift in our pension provision.
Unfortunately, the Government's failure to help employers through the last few years, and the failure to prepare individuals for the future they face, have meant even bigger retirement risks for private sector workers. Public sector workers, however, have remained protected.
Morrisons, Barclays and BP are the latest major companies to throw in the towel, with BP closing its scheme to new members, and Barclays closing to existing workers as well.
The writing has been on the wall for many years, while policymakers have failed to grasp the reforms needed to help manage this fundamental shift in retirement provision for British workers.
The demise of these top quality, traditional pension schemes is a serious issue for the future, as more and more employees face uncertainty in retirement, with inadequate state pensions, no employer to rely on and an annuity market that they do not understand.
Just five years ago, about 40 per cent of companies still offered final-salary pensions to new employees. Now there are just four FTSE 100 firms who do so – Shell, Tesco, Cadbury and Diageo. As their competitors pull out of open-ended pension commitments, the business case for retaining final salary arrangements becomes increasingly untenable.
In fact, given the enormous costs involved, the question for most boards is not why should they close their scheme, but why should they keep it open.
A final salary pension adds more than 20 per cent to payroll costs, and, given the large deficits in most schemes, the costs in coming years could well rise to more than 40 per cent.
But it is not just the level of cost that is the problem, it is also the uncertainty of that cost. BP has closed its scheme to new members, even though it was in surplus, citing the future risks.
Employers and shareholders in the 21st century are simply unwilling to write the huge blank cheques associated with final salary pensions any more, especially as most of their competitors do not do so and loyal, life-long employment has become a thing of the past. The trend is unstoppable.
In the next year or so, about half of the UK's final salary schemes will be releasing their three-yearly statutory funding statements, valued at the end of March 2009.
This is awful timing, and the resulting deficits will make dreadful reading. Asset prices (particularly equities) were very low, and the Bank of England's policy of quantitative easing – introduced during March – artificially depressed gilt yields, which increases pension liabilities.
The huge deficits to be announced in coming months will lead to a torrent of new closures, as private-sector companies try to cope with the costs of making up past deficits and hope to avoid the pain of increasing liabilities in future.
That leaves workers increasingly on their own to provide for their retirement. The days of relying on an employer to support you in old age are almost over. This is very bad news for workers, who are not equipped to deal with the risks and costs that they face. Of course, this applies only to the private sector – public sector schemes have been relatively unaffected.
When it comes to pensions, those making policy are totally divorced from the reality facing the rest of the country. Public sector schemes look increasingly out of line with reality. Policy-makers are cocooned in their own pensions world, seemingly oblivious to what is happening in the private sector. Policy has fallen far behind the needs of the population. The increasing divide between private and public sector schemes cannot continue indefinitely.
But, in the meantime, more and more younger workers face a bleak retirement on inadequate state pensions and disappearing private provision.
They will have to keep working far longer than expected, or face an impoverished old age.
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Saturday 26 May 2012
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