The death of the final salary pension fund – for the private sector

Ten years ago Ministers still claimed that the UK had the best system of occupational pensions in Europe. They could point to the fact that British people had more money saved in pension schemes than all the rest of Europe put together. The creation of the occupational pensions movement, and the establishment of a final salary scheme by most medium sized and larger employers meant many could look forward to a decent income in old age, and retirement at 65.

Today, the picture is very different. Large numbers of schemes are closed to new members. Many are also closed to existing members, who are no longer allowed to save more to add to their final salary scheme. We are currently hearing of very large and well financed companies deciding they too can no longer afford to go on with generous pension schemes, and are about to close theirs. Some schemes have collapsed, along with their sponsor companies.

How did we get into this mess?

Many schemes are in substantial deficit because

1. The tax on their investment income, introduced in 1997, reduced the investment return and damaged prices of shares the funds owned over the ensuing 12 years.
2. The last ten years (to March 2009) have seen no positive returns on UK and US shares. The Credit crunch and recession have wiped out all the gains of the decade, leaving pension funds considerably worse off than if they had remained in cash.
3. Those valuing funds make assumptions about how much future inflation there will be. The higher inflation is, the more money the pension fund needs to pay out the higher pension payments. Most valuers these days insist on an inflation rate higher than the 2% target rate the Bank says it will keep to – at a time when RPI inflation is negative. Government reliance on low inflation figures is not reflected in pension fund valuation.
4. The good news that people are living longer is bad news for pension funds. They are having to provide more money to pay pensions for longer.
5. Pension funds now have to pay a tax or levy to the Pension Fund Protection scheme. In other words,successful funds are now taxed to pay the losses on less prudent funds. This additional cost makes employers even keener to keep down the contributions on their own fund.
6. Regulation has greatly increased, requiring employers to spend more and more money on legal, actuarial and other advice and compliance. Trustees find it very difficult to make sensible decisions, as they are so hedged around by the rules. The main conclusion of most of the advice is that funds should now own more and more government debt, despite this only producing an income of around 3 to 4%. People fear this will not enable them to pay all the pensions in the future at an acceptable level of contributions.

The result of all these pressures is that many companies say they cannot afford the large contributions now required, and cannot afford the risk of the open ended commitment to employees. Some companies are in the position where the pension fund is worth much more than the company, and where the future pension risks and costs are higher than the main risks and costs of running the business. Western companies facing these costs have to compete with Asian companies that often carry no such requirement.Pension costs can help bring an entire company down in a competitive global market.

It is a sad example of where the combination of higher taxes and more regulation leads to the end of a good idea, instead of being its salvation. Never have pension funds been so regulated. Never have so many been closing down or cutting back. Government has contributed it make it both too dear and too dangerous for many to run a final salary pension scheme. Paradoxically, having achieved that for the private sector, the government continues with such schemes – many completely unfunded – in the public sector. This is becoming a matter of controversy, generating a big sense of unfairness. I will look at what could be done to rebuild pension savings and to establish more fairness in a later blog.

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54 Comments

  1. Posted June 24, 2009 at 7:37 am | Permalink

    One of the philosophical problems with pension contributions is the length of time that they are made over.

    I have had various personal pension schemes for over twenty years – all of my working life. In that time-frame, the expected final yield has varied wildly from year to year, and the tax regime had changed just as frequently.

    It’s impossible to plan ahead when there is no consistancy. However, it’s not reasonable to expect economic stability over decades, even if politicians manged to resist the temptation to fiddle with pensions tax and contributions law (generally to the detrement of my funds)

    Add to that the usual insult of the pension providers – if the fund is not doing well enough, I’m expected simply to pay more in. Apparently it’s always my fault for not paying in enough money, never the fund managers or the financial industry for failing to meet their promises or my expectations.

    I resent my taxes being used to pay for platinum plated pensions for the Public Sector, because whenever my pensions are doing particularly badly, the Government simply comes along and takes more from me in taxes to pay for their short-fall. However, I can see how a life-long public servant who was promised a particular pension entitlement as part of their renumeration would be reluctant to let it go.

    To me, the obvious solution is to draw a line in the sand for the Public Sector – after a specific date, all new contributions are made into private funds, just like the rest of the populus. At least that way the unfunded cost and future liability of the high-specification pensions will begin to diminish. Existing entitlement to that date will be paid on retirement, but no new entitlement will be accrued. It’s a change to the pension provisions for Public Sector workers, but it is a single identifiable change.

    • Posted June 24, 2009 at 9:45 am | Permalink

      It is relatively easy to estimate the expected return of any portfolio over the duration of the average working life, say 40 years. Trouble is the expected return premium over the risk free return (cash or IL Gilts) looks small, maybe 3% or 4%. And by some simple sums people soon work out given those returns that they will have to put away say 12% to 15% of their gross pay every year they work. When doing this on a money purchase basis out of your earnings as self employed you also realise that you could end up with £500,000 of YOUR money in pensions, of which you can get back £125,000 as cash. The reactions are mostly

      (a) On yer bike – I cannot afford 12 to 15% of pay,
      (b) Half a million! Nah, don’t beleive it.
      (c) Do you mean to say that I’ll have all that money and I can only get a quarter of it back. Sod that.
      (d) Stuff it. I’ll buy some houses to let.
      (e) …and I HAVE to buy this annuity thing?
      …and so on.

      People have been so lied to by politicians and badly educated by the state indoctrination system and badly advised by the cartelised banking system that they do not feel confident in asking for the right help, or giving it credibility when it is offered. Add to that a massively complex and confiscatory tax system that has inbuilt disincentives to save and invest and you end up with no-one saving. This is evdenced by the collapse in the savings rates over the last 12 years.

      Nevertheless, regular investment into pensions or other collective investment schemes like unit trusts over a working life will always build good capital to liberate patient and prudent individuals from the thrall of employment at some stage. That and paying off debt of course.

    • Posted June 24, 2009 at 2:00 pm | Permalink

      My husband’s Prudential pensions forecasts over a 35 year period were not only consistent and stable, the return was exactly as forecast – payments commencing shortly before Britain’s financial meltdown ‘came to light’.

      The only ‘shocker’ was Labour’s tax imposition on his hard earned pension.

      With regard to your last paragraph, British taxpayers are paying extortionate sums to fund EU beauracrats’ guaranteed, lucrative pensions; a far more serious concern to those funding it than ‘at home’ public sector pensions.

  2. Posted June 24, 2009 at 7:53 am | Permalink

    Another thoughtful analysis showing how a worthwhile scheme can and has been brought down, largely by government meddling. One point of disagreement re the PPF. The levy is not to pay the losses on less prudent funds. It is a reflection of the success of the owning businesses. Funds are taken into the PPF because the companies went out of business or into administration. Also it should be remembered that members of such schemes who have not reached retirement age lose a proportion of the pension to which they contributed and the pension payment is also subject to a cap. Most of the surviving final salary schemes would end up in the PPF if their companies went out of business today. Contrast this with the public sector, including MPs pension schemes, where the taxpayer is just expected to stump up any shortfall.

    • Posted June 24, 2009 at 4:00 pm | Permalink

      Comrade! This is not the party line.
      Equality works for us, not you!
      The cadres get the pensions they deserve.
      So do you, capitalist lickspittle!
      (PS How ironic I am when I am being clever!!)

    • Posted June 24, 2009 at 7:04 pm | Permalink

      Long serving Woolworth’s staff, as an example of many, lost their pensions as well as their jobs. According to reports, legislation allowed management to raid pension funds to prop up ailing business.

  3. Posted June 24, 2009 at 7:55 am | Permalink

    Yes correct in so many ways.

    In addition many people having seen how pension Funds have performed over the last 10-12 years see no point in making provision for themselves for the future using pension schemes, unless the Employer is paying a large sum into that scheme.

    They perhaps use other methods or make other provisions.

    Those who are self employed and who pay 100% of their own money into such schemes, without any Employer additional contribution, have seen funds very often reduce in value over the last 10 years to below the level of their contributions.

    Clearly we are all aware that Pension investment is a long term arrangement, but 10 years is a long time.

    The other problem as you correctly outline John, is that rules, regulations and goalposts change, with such regularity that the Pension holder is often left with a policy which bears no comparison to what they originally signed up for.

    How many people suffered MVA’s when attempting to transfer funds. Loss of Guaranteed Annuities. Loss of Guarranteed bonuses etc.

    Its all very well locking away your investment, but it is locked away for life (until you decide to retire) so if your circumstances change, you cannot re arrange your own funds to best advantage.

    The dreaded purchase of an Annuity where it takes you now 20 years to get your own money back, without interest, is another turn off.

    Oh how fortunate are those who’s pensions are publically funded (by those who also have to provide their own).

    Time to have a drastic re-think, many Companies are now ruinning a pension deficit larger than the Companies worth which is a nonesense.

    We also need to look at how the State Pension operates, in conjunction with the benefits sysytem, where the more frugal are at a disadvantage over the I have spent it all brigade.

    Understand that the UK state pension is now the lowest in the Western World. (according to today’s press)

  4. Posted June 24, 2009 at 8:04 am | Permalink

    Absolutely correct John. My company offered a final salary scheme up until a few years before I started last year. Since then they still offer a fairly generous contributions scheme, but there is talk of the company having to cut back the level of contributions made because of ever increasing pension costs.

    When will someone in the Conservatives stand up at question time to point out to the PM the gap between public and private sector retirement that his policies have resulted in?

    • Posted June 24, 2009 at 9:52 am | Permalink

      Mark M: “When will someone in the Conservatives stand up at question time to point out to the PM ..”

      Have you seen one PM question time where the Gordzilla gives an answer that is related to the question posed?

      Ever?

      But don’t worry. Gordzilla is going to rebuild respect for politicians and mend the broken political system in the UK.

      This will not include elections because as has been clearly demonstrated in Iran, elections cause chaos.

  5. Posted June 24, 2009 at 8:27 am | Permalink

    Its the classic endgame of Socialistic Bureaucratism. The FS pension scheme debacle is an excellent paradigm for the manner in which Socialism destroys wealth.

    You could have added that Brown’s bonkers tax and fiscal policies gave an unfiar advantage to debt capital over equity capital.

  6. Posted June 24, 2009 at 8:46 am | Permalink

    I cannot find anything in your post with which I disagree. However, for those of us who are currently contributing to public sector pensions it looks increasingly likely that we will have retrospective and detrimental changes forced upon us to help bring the Governments finances back into balance. We signed up to a scheme in good faith, we paid our dues every month to save for our old age. We have behaved entirely responsibly. It is not our fault that the Government and the bankers have collectively wrecked the UK economy and I fail to see the logic of destroying public sector pensions just because somebody else has destroyed the private provision.

    Many of us resisted the temptation to join private pension schemes in the 80s which were offering absolutely huge projections relative to what we were likely to expect were we to remain in the public sector, but now it appears we are to be punished for our prudence. Can this be right? Existing benefits must be ring fenced and protected – I’m sure the MPs who have the most generous pensions of all will ensure that their own are!

    • Posted June 24, 2009 at 9:28 am | Permalink

      No. Even as an very annoyed private businessman I would not countenance the retrospective reduction in the benefits you have earned under your contract of employment. It is characteristic of New Labour to simply ignore contracts, but not supporters of the rule of law.

      What can and should happen is that on A Day all public sector schemes should be closed. Those with acrrued and now deferred benefits in those schemes will continue to have those benefits available on the original terms when they reach NRA. Simultaneously on the A Day a new money purchae arrangement will be established for all public employees. It will have the usual investment opportunities. Employer contributions will be capped at say 8% of pensionable pay.

      The purpose of using a money purchase is scheme is to establish the connection between wealth creation and pensions entitlements in all sectors of society. State employees will realise that they need to make very sure that UK plc is healthy and creating wealth in order that they can enjoy a comfortable retirement. If government policies lead to wealth destruction, like New Labour’s have in spades, they wll be more likely to vote in MP’s who won’t make such mistakes.

      It is this current disconnection between real world wealth creation and state employees pensions entitlements that has the be addressed. It is just not fair.

      In regards to your second paragraph I can, to a degree, sympathise. Taking people out of state FS schemes into PP and similar was rife. But, it is your responsibility to fully examine offers made to you. Caveat emptor applies. Plus of course the best rule of all, if something looks to good to be true it probably is.

    • Posted June 24, 2009 at 7:22 pm | Permalink

      Nulabor habitually punishes the prudent and supports wasters and wastage !

      A relative (longserving NHS employee) did opt out of the NHS pension scheme and transferred to the fateful Equitable Life private pension. The government (reportedly) continues to sidestep the findings of the parliamentary ombudsman on this issue regarding recompense for loss.

      I heartily encourage the young to accrue and manage their own ‘nest eggs’ for their retirement; invest in commodities which will appreciate in value. How much hard earned cash is lost in management (or mismanagement !) fees ?

  7. Posted June 24, 2009 at 8:47 am | Permalink

    It appears to be intentional; those working in the private sector lose, whilst government controlled ‘box tickers in the public sector benefit. I wonder for how long ? More and more private agency workers are used in the NHS, care of the elderly; also now the police, child welfare (result of ‘BabyP’), thus prohibiting current ‘public service’ pensions.

    This explains why the pressures placed on government employed public service workers is made so onerous and stressful, many leave; box ticking rules and regulations detract from the job they were trained to do It’s in the interest of ‘pension funding’ to do so. I’ve witnessed this in the privatization of care of the elderly as well as the NHS.

    • Posted June 24, 2009 at 8:48 am | Permalink

      John,

      PS – I look forward to reading your proposed remedies.

  8. Posted June 24, 2009 at 9:12 am | Permalink

    You are spot on – again!

    Yesterday I saw the BBC report on this same issue. They failed, totally, to mention the fact and impact of Brown`s tax on pension fund investment income (the first item on your list).

    That is when the rot set in as it fatally undermined the basis of final salary schemes – excepting, of course, a “final solution” of early, involuntary euthanasia.

  9. Posted June 24, 2009 at 9:37 am | Permalink

    Unless you work for the General medical council which proudly boasts that it runs a final salary pension for its 470 employees

  10. Posted June 24, 2009 at 9:37 am | Permalink

    Hi John

    Completely agree with your assessment unfortunately we have known about this for a number of years, I can recall a lunch in the City where you made the same point.

    The worrying thing is that for the private sector this is yet another burden – it is bad enough with taxation without having the risk of a defined contribution scheme on top while the public sector brethren get higher wages and a unfunded, gold plated pension scheme.

    Pensions apartheid

  11. Posted June 24, 2009 at 9:41 am | Permalink

    #4 that people are living longer is the underlying factor that will not go away no matter how well we run things. Throughout the last century life expectancy has gone up by about 1 year in every 4 passing. I suspect that in the not distant future somebody is going to find some method of slowing, reversing, or worse stopping, the aging clock. As a society we are actively not thinking about this. When it happens the pensions industry is gone – this will be one of the minor effects.

    On a less armageddonist point I would suggest that all income tax & NI not be charged on earnings by those over 65. This should cost almost nothing since they wouldn’t keep jobs otherwise & would be a very substantial bonus to the people. Would still keep it on for higher tax rates since they are hardly in want & probably not really motivated by the money.

  12. Posted June 24, 2009 at 9:52 am | Permalink

    I agree with everything you write here. The motives of those who engineered what has happened to pension schemes in the commercial sector have had one aim in mind – to drive great swathes of the population, in one way or the other, into the hand of the ‘State’ and if you look at it from that perspective then Nulabour (Blair, Brown and all their colleagues) have been pretty successful. It’s not an accident what has happened – it was deliberate policy. The other end of the spectrum has been dealt with by the proliferation of ‘benefits’ and ‘credits’ of various kinds, all designed to make recipients dependent on, and therefore continue to vote for, the politicians who put them in place.

    The withdrawal pains for many years following a hoped-for Conservative victory at the next election will be very intense – addicts deprived of their fix don’t react well. Real living standards will have to drop very significantly – hardly any politicians, from any political party, are willing to talk about this openly. Or deal with ‘reforming’ their own expenses in a justifiable manner. Quick cosmetic fixes will go nowhere far enough.

  13. Posted June 24, 2009 at 10:01 am | Permalink

    I am an AFPS pensioner. Every pay award since 1970 was abated by 11% to compensate for the AFPS non-contributory aspect. I am also a member of the Forces Pension Society. They have haggled with governments of all colours to try and get various problems sorted out. The answer to most of the AFPS faults was to adopt the MPs pension scheme details. No chance.

    Lets have the MPs set an example. All new MPs elected at the next GE get a pension funded by a fund they have paid into. No bail outs by the taxpayer.

    • Posted June 25, 2009 at 8:25 am | Permalink

      In regards to the Military – I think that an exception to my money purchase for all rule could be made. The Military uniquely deliberately put themselves in harms way on our behalf and are therefore an entirley special case. This rule does not apply to the police or the fireservice whose jobs and not as routinely life threatening and in fcat they are trained to avoid danger.

  14. Posted June 24, 2009 at 10:18 am | Permalink

    I can recall my godfather and his wife living in penury in Suffolk in the 1960s. I can see it happening again to many people as in the next few years there will undoubtedly be a crisis as ‘retirees’ find that their personal pension schemes provide an inadequate income despite a lifetime of contributions and after a working lifetime of reasonable salaries and a reasonable but not excessive lifestyle (in other words an ordinary working life).

    This crisis has been/will be caused by a number of factors, including a weak stock/bond market, an understandable desire for companies to limit their exposure to final salary schemes and lastly and by no means least, the Government’s complacency (greed) with respect to tax relief and the consequences of its 1997 removal, after all why worry when what Mr Anderson justifiably calls a ‘platinum plated’ pension can be expected after say 30 years in Parliament or the Civil Service when the rest of us will have worked for anything upto 45 years (no dig intended at you Mr Redwood but I’m sure you know what I mean!).

    • Posted June 24, 2009 at 7:39 pm | Permalink

      Many pensioners suffer increasing hardship due to ongoing rises in basic living costs, council tax, fuel, food, petrol etc.

      Prohibitively expensive council tax should be abolished and the former rates system’ reinstated. Every household once paid for basic community services, refuse collection etc. and were affordable.

      I wonder how much income from council tax is wasted dealing with exemption claimants ?

      • Posted June 25, 2009 at 6:44 am | Permalink

        The old poll tax was the best system to pay for local services.
        Everyone benefits from local services to some degree, and it is better for everyone to pay a little, rather than some pay a lot and others nothing.

        Councils have to fund ever growing finance demands as the public pension cost of Police, firemen, council workers etc etc, and that is but one reason why the cost is so high, there are many others.

        • Posted June 25, 2009 at 8:17 am | Permalink

          I was referring to the effective rates system prior to poll tax which, under Labour, has become a ‘stealth’ tax – council tax.
          Government funding to Councils is ‘political’, i.e. labour run councils receive highest government allocations, whilst conservative run councils the lowest.

          Government’s ‘politically based’ distribution ensured Hammersmith Council’s reduction in council tax as promised to those voting for the Labour.

        • Posted June 25, 2009 at 11:51 am | Permalink

          Jean

          Aware you were talking about the Old rates system, where what you paid depended upon the rentable value, that the Council put on your house. This was the method used to calculate rateable value.

          Clearly this was also a nonesensnse, as the rentable value of your house means nothing at all.

          Sometimes people who live in large houses, do not earn large sums of money, they may also be retired or widowed.

          You could have a small house of multiple occupation which is the other end of the coin.

          The sensible route is for every one to make a contribution to the services or area in which they live.

          This can either be a Poll tax type tax, or local sales tax (as in the US)

  15. Posted June 24, 2009 at 10:32 am | Permalink

    Maybe in order to get tax benefits, all schemes should conform to national accrual norms, maybe using the PCSPS scheme.

    No special tax breaks for exclusive schemes e.g MP’s , House of Commons, The SCSPS, Senior Bank Exec schemes. We should all be subject to the same laws and policies when enacted.

    Maybe all schemes should be ‘fully funded’ going forward.

    Maybe a national scheme based on PCSPS should expanded to all private employees not in a Final Salary scheme.

    In my experience most contribution schemes have not proven to be of great value, values pretty close to less than contributions much less if you include tax relief, this before the recent crash.(FTSE@6000).

  16. Posted June 24, 2009 at 10:33 am | Permalink

    This destruction began with this clown, Brown in 1997. The utter stupidity beggars belief. I suspect it may well see the death of (a named large company-ed) as well as other once great companies. Only the complete trouncing of Labour can ever begin the long haul back to some sort of common sense economic policy.
    My hope is the re-instatement of dividend relief would so boost the FTSE as to begin to strengthen equity holdings again. Add other incentives to improve equities and reduce tax burdens and off we would go. In fact do the exact opposite to anything Labour has or will do and that alone would work!

  17. Posted June 24, 2009 at 10:43 am | Permalink

    You promise a later blog on how to rebuild pension saving. You need to consider whether there is ANY point in saving for a pension. If you are not well off, it involves great sacrifice to save for a pension. But the people next door can spend the lot, save nothing, and then along comes the State and tops up their retirement income to some minimum which could amount to the same as the couple who made sacrifices all their life. That couple can see that a lifetime’s saving made them no better off than next door who blew the lot on holidays. Where’s the fairness and incentive in that?

    • Posted June 24, 2009 at 6:08 pm | Permalink

      Hear hear to that Colin. I have paid 11.5% of my income per annum into my public sector pension for the past 20 years and I am now facing the prospect of having various detrimental changes forced on the scheme by the Government and my retirement plans are now in tatters. It might make some people with poorly performing private plans feel better if my retirement is wrecked by the Government but it’s morally repellent. I shunned the opportunity to opt out in the 80s and join the pps bandwagon when all the advice was suggesting massive returns when compared to my public sector plan. I have dutifully paid my dues for 2 decades. It is not my fault the scheme is unfunded, it is not my fault the economy has been wrecked or that Labour has massively increased the numbers now entitled to a public sector pension – people voted for all this when they elected Labour with landslides three times (I didn’t vote for them).

      Is it fair to punish me for paying close to £300 per month for most of my adult life into a pension pot? The feckless throw themselves at the mercy of the state to pick up the tab after failing to save for retirement. People should lay off those of us who have played by the rules and blame Brown instead for wrecking their old age

      • Posted June 25, 2009 at 8:36 am | Permalink

        Trouble is the 11.5% you pay is about 1/3 of what the pension costs. Overall public sector employers pay about the same as the income tax notionally deducted from your pay. So you persoanlly make no net contribution to general goevrnment spending, all your ‘tax’ goes to your pension scheme.

        Now, I well appreciate that this is not your fault, you have been conned as much as the rest of us in private business, but it cannot go on. Reform, genuine reform is desperately needed. The costs must be capped and then reduced.

        I have posted above that I do not accept that a contractual variation of benefits accrued to date is acceptable, but it is entirely correct and legal to change the basis on which you accrue all future benefits.

        And although I understand that you might consider the structure of your existing scheme to be part of your employment contract I think force majeur could be cited as the driver for the change. Or if further arguement ensues you could be laid off and required to re-apply for your job on new pension terms.

        A New Labour mantra is that money purchase schemes leave pensioners at the mercy of the ‘uncertainty of markets’. This shows breathtaking ignornance both as to simple economics and as to how money purchase pension funds can be strucutred to defend older pension savers from the necessary volatily of the equity markets. It’s either ignorance or deceit.

        • Posted June 25, 2009 at 11:49 am | Permalink

          Lola I accept your point about the cost of the scheme versus my contributions, however, my pension scheme has been run that way since 1947, the state old age pension is funded the same way and to my knowledge so is the MPs pension (THE most generous public sector scheme). Governments of all persuasions have known this for decades and so it’s a tad disingenuous of John to mention public sector schemes being “unfunded” as though it’s some big secret.

          I accept that the current situation is unsustainable. However, the point I am trying to get across is that were I to join most of my friends in simply not making ANY provision at all for my old age, then the state would have to pick up the tab. Shouldn’t we look at that anomaly before taking the axe to those of us who have been prudent and followed the rules?

        • Posted June 25, 2009 at 3:37 pm | Permalink

          Re Tony Short comment.

          You are confusing your prudency – well, luck or foresight in pickig a state employees career at a time when they were certian of super-profits – with the profligacy of the all the state employees pensions schemes, MP’s and everyone else.

          Yes, you’ve done as you should and saved into an employers scheme. But the way that it is run and funded and its rules mean that you are heavily subsidised by private business. Why is this right? In fact as a state employee the PAYE notionally deducted from your pay is merely a rebate to the rest of us. the fact that it and your NI neatly nets off against the cost of your pensions is just a double insult.

          The fact that all thsi started in 1947 is not relevant as such. Actually Barbara Castle made the whole thing a whole lot worse in the late 1970’s. And many people have been saying sinec 1947 that it was unsustainable.

          Now, I sympathise with you that you should not have your already accrued benefits reduced. But, the rot has to be stopped now and that can be done very simply by closing all the schemes and placing everyone into a money purchase arrangement. Existing members will have their deferred benefits preserved and retired members will continue to be paid.

          In regards to the BSOAP and SERPS/S2P they should both be scrapped and replaced by some form of citizens dividend based on lvt. Mind you this also menas radically shrinking the size of the state payroll.

    • Posted June 24, 2009 at 9:53 pm | Permalink

      Colin

      Agreed, that is why the whole system needs looking at as they relate and work for but against each other.

      At the moment if you try to look after yourself in a modest way you are on your own.

      A great shame Frank Field was sidelined by Brown in the very early years of Labour. He may have had some sensible input.

      The Conservatives would do well to try and use some of his knowledge and ideas, as well as some of their own.

      • Posted June 26, 2009 at 10:39 am | Permalink

        Lola wrote:

        “you are heavily subsidised by private business”

        Yes. And private business (namely the banks) are now heavily subsidised by the tax payer, of which I am one. Fred Goodwin got his pension courtesy of the state bailing him out, but it seems that I’m not going to get mine – or certainly not on the terms I signed up to. I take your point Lola but I can’t help but feel I am being punished for the mistakes of politicians and bankers who have mismanaged the economy and who are decimating everyone elses pensions whilst featherbedding their own old age. What incentive do I have to continue to save in a pension? Will someone change the rules again in another ten years and force me to work till I drop dead? Meantime, Wayne and Waynetta Slob down the road who contribute zilch and live on benefits their whole lives will get looked after by the state when they get old. What do you suggest we do with them?

  18. Posted June 24, 2009 at 12:12 pm | Permalink

    Thank you fro highlighting this ongoing problem, it needs all the publicity it can get.

    I would like to pick out a couple of the regulation changes that took place.

    One was the cap on funding a surplus of no more than 5 percent. What you used to have was schemes that would over invest in the good years so that when the company or industry faced a lean period they had some funding in reserve. The cap meant that they couldn’t over fund during the good years to tide them over during the bad years (rings a bell from somewhere).

    A second change was a change to the accounting practice. A snapshot of the scheme is taken and that position is added to the bottom line of the overall accounts of the company.

    Schemes looked to meet their funding requirements over the decades, a snapshot each year does not take this into account and treats it harshly. That deficit is then added to the company accounts. The often large deficit can potentially cause their bank loans to foreclose on them as it can take the debt of the company over their acceptable limit. This liability risk to the company means they have to close them.

    There is one thing I would like asked of the Government before the Election. What are their proposals to fund the trillion pound public sector pension liability?

    This is a massive liability and we need to know what Brown intends to do

    a. Raise tax and NI
    b. Take more funding each year from other departments
    c. Cut the public sector pension benefit.

    With such a huge liability in addition to the expected borrowing and bail out to cost 1.4 trillion in a few years the public need to know his proposals.

  19. Posted June 24, 2009 at 12:19 pm | Permalink

    John Hawksworth at PWC recently published a report that took into account the cost of the public sector pension as well as the borrowing.

    http://www.ukmediacentre.pwc.com/content/Detail.asp?ReleaseID=3241&NewsAreaID=2

    They estimated the cost to be between 4600 and 5300 pounds per head per annum above what we currently pay.

  20. Posted June 24, 2009 at 12:23 pm | Permalink

    The differential between public and private pension provision raises a number of interesting points. The public sector unions used to claim that public sector employees accepted lower wages and salaries due to the enhanced pension provision. Now that public sector pay has caught up and in many cases surpassed private sector wages and salaries this argument has been forgotten and the unions now push for high public sector settlements as well as the high pension provision.

    This position is unsustainable in the short term, never mind the long term. Somewhere along the line the total salary bill (including bonus, pensions and expenses) of the public service is going have to be caped.

  21. Posted June 24, 2009 at 12:33 pm | Permalink

    I someone took a good hard look, they would discover that very many of the public sector pension funds are in worse shape than the private ones for a number of reasons. The difference is that the taxpayer, or the government’s creditors will have to provide for the shortfalls. Also, just how many Labour ministers, or M.P.s, and members of their immediate families are either in such schemes, or already drawing an additional income from them that they do not have to declare? There could be some interesting figures here.

  22. Posted June 24, 2009 at 1:01 pm | Permalink

    This is an important point made, however outside of the financial savvy or those approaching retirement age there is a lack of understanding of how serious the reduction in pension provision wil be in the future. The decline in final salary schemes had two starting point – Maxwell falling of the boat after raiding his company schemes and Brown meddlling in 1997. The events brought in over regulation and reduced returns the impact of which is now being felt. The annoying thing now is that the 2012 reforms are being bungled and as such propose setting a minimum standard will be worse than most money purchase schemes.

    I think we need to go back to look at the whole pension provision in the UK and look at both the inadequate private provision and the unaffordable public sector provision (largely still final salary or open ended liability). There is also a realisation that individual responsibility for old age provision also has to be taken into consideration.

    On thing at least there will be corrective property price moves in the long term as baby boomer offload their houses to fund their retirement.

  23. Posted June 24, 2009 at 2:56 pm | Permalink

    We’re probably going to need some new taxes to pay for Labour’s decade-long spending spree.
    So how about a tax on public sector pensions ?

  24. Posted June 24, 2009 at 3:19 pm | Permalink

    I think all people, public servants included, should be entitled to take their chosen pension contribution, and their employers contribution, and save it in a SIPP, choosing where it goes and who manages it themselves. That way if it goes wrong it’s no one elses fault.

    I really feel for all the people who have had their life savings plundered over the last couple of decades by the ineptitude and serial mismangement of the pension industry. I accept Brown’s tax on dividends is a factor, however it’s not the only cause if the problem.

    It’s just one scandal after another with the financial services industry. Why should we be expected to trust them?

  25. Posted June 24, 2009 at 4:05 pm | Permalink

    I well remember in those first glorious moments of Gordon Brown as the Iron Chancellor when the huge £500 billion annual tax was announced. Poor Mr Willetts was there to face the music on behalf of the hated Toories.
    “And would the Tories remove the taxes?” asked the BBC announcer, his lip curling upwards to match the moral tone of the time. He was, of course, secure on his vast salary and with a huge pension to look forward to. But – hey – he was worth it!
    Mr Willetts, an honest man, looked forward the twenty years or so into the future when he might be a minister.
    Then he remained silent as the brilliant questioner repeated the question…..

    • Posted June 24, 2009 at 7:57 pm | Permalink

      I wonder, would the same ‘brilliant questioner’ ask one of Brown’s minions why they so willing hand over vast sums of British taxpayers’ money to the EU to fund their far more lucrative ‘gravy train’ pensions.

      I doubt it …… BBC is far too Labour biased – hence the ‘curling lip’, most unprofessional.

  26. Posted June 24, 2009 at 7:31 pm | Permalink

    How refreshing that this blog got 30 plus comments. In the past, mention about pension funding and the looming black hole in it and it was like a fart in a hurricain.

    In 10 years we have a multi trillion pound black hole developing. Too late now, especially with the over borrowing to solve it. However, it needs to be pushed into the public domain.

  27. Posted June 24, 2009 at 9:59 pm | Permalink

    Standard of living does not fall month on month, it falls when your life changes. When you retire you may get less than your father, but it’s hard to feel that loss. When you graduate you may have bigger debts than your father, but it’s hard to feel that loss. When your taxed stealthier than your father it’s hard to feel that loss. We as citizens are losing under labour. Not all the time, but when our circumstances change they change for the worst.

    • Posted June 25, 2009 at 10:20 am | Permalink

      This is so true. I got married by a traditional Church ceremony to a woman who wanted to be a wife and mother in 1963. We had no difficulty in finding a house and starting a family with pension prospects and a bright future. I obtained a completely free university Education and a post graduate diploma – twice. Now I am living in my own house as a proud grandparent.
      Three of my children live abroad to find the same standard of living. All are professional people, like I was. The fourth is battling on against the recession.
      Their children will face an even harsher reality when the debt and high taxes and permanent EU take hold, especially since their education, at State Schools, is nothing like their parents’.
      Lucky me!

      • Posted June 25, 2009 at 11:43 am | Permalink

        Mike

        Absolutely correct, life was so much more simple in the 60’s and 70’s.

        Its far too complicated now, mainly due to government interference complicating everything.

        I only went to a bog standard Secondary Modern School and was not interested in anything else at the time other than playing football, but the basic education I got there and then, appears vastly superior to what most comprehensive schools offer now.

        Having served a proper time served apprenticeship (as opposed to some of the micky mouse training offered today) having then realised the value of education (night school and day release at Poly tech) and having now worked in my own business for many years, I can truthfully say that disipline, and a solid education in the basic subjects, especially mathematics, gave me a very good grounding for the rest of my life.

        What price that today ?

  28. Posted June 24, 2009 at 10:04 pm | Permalink

    To save your readers from having to spend thousands of pounds and years in College studying economics so they can understand pensions, I’ve produced this 2 min video.

    http://www.youtube.com/watch?v=OcrfaWzREVM

  29. Posted June 24, 2009 at 10:27 pm | Permalink

    Another problem affecting lower paid people’s willingness to invest in a pension is the fact that if you don’t have a pension, you can get all sorts of extras on top of your state pension. If you have any form of pension income, you promptly loose these benefits, so if you are only likely to have a small pension, why bother?
    My daughter (against my advice) has decided to live for the present and not put money into a pension. She is buying a decent house, and says that if she is hard up when she retires, she’ll either move into a smaller place or re-mortgage it for equity release.
    As she points out, my wife and I spent our life saving and went without many luxuries; now retired we are quite comfortable and could afford to go travelling, but are no longer fit enough to do so. If we, unfortunately, have to go into an old persons’ home, the council will force the sale of our house to get their money, and anything left will be taxed at 40% before she gets it.
    She takes the view that having come into this world with nothing, she intends to leave it in a similar way; in the meanwhile she intends to enjoy herself as much as possible and allow the government to get their hands on as little as possible.
    What logical arguments are there against this point of view?

    • Posted June 25, 2009 at 6:57 am | Permalink

      Brian

      No logical answer against what your daughter is doing, it seems its what most younger people are doing at the moment.

      The problem arises when, and if the system changes, to one that we as a Country can afford.

      We cannot continue for much longer with the present format its simply not possible in financial terms to be sustainable.

      Then if you have no savings you will suffer perhaps more than now.

      Take your point about Care Homes, cost from £650 per week here in Wokingham, £1,000 per week if you require a lot of care.

    • Posted June 25, 2009 at 10:25 am | Permalink

      1. Your daughter is not, I presume, a wife and mother herself?
      2. All it needs is for Standard and Poors to downgrade the British State to AA rating and – bingo! – all the hand-outs will disappear or diminish to nothing. Or for the easing to get out of control. Or for Gordon Brown to be re elected.
      We thought, in 2004, that Spain would be a good place to retire to…..
      In the summer the grasshopper laughed at the ant……

  30. Posted June 26, 2009 at 1:50 pm | Permalink

    The working conditions such as safety and holidays are now quite regulated by law. This along with the minimum wage legislation makes it increasingly difficult for employers to cut costs. This is the next logical step in reducing costs in something they have control over. Paying for things related to work such as parking and materials/equipment used in carrying out work will be next.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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