In 1997 the UK had the best private sector pensions schemes of any European country. We led the world in saving and providing for retirement out of funds that employers and employees put to one side for old age.
Labour’s tax attack started the rot. Funds that were solvent, with plenty of assets to pay future pensions, suddenly had to find £5 billion a year for the Inland Revenue. Shortly after we had the Dot Com crash. We were into the decade of disaster. The Credit Crunch crash snuffed out hopes of a revival from investment gains a decade later.
The latest figures show that only 21% of the surviving pension funds are still open for new members to join. A fifth of funds are now closed to new contributions and new years of provision for exisiting members. Last year saw high levels of closure of funds to exisiting members. No-one now seems to think the final salary pension scheme can be rescued for future generations in the private sector. Attention has turned to creating equality of disappointment by worsening the terms of public sector schemes to protect the taxpayer from their future costs.
Why have pension funds become unaffordable? Can anything be done to restore them?
Today there is a unique combination of circumstances that conspire against new schemes, or even maintaining existing schemes. It is not just the tax, though the tax rises started the decline. Were government to announce the restoration of full tax privileges there would be no rush to re-establish full final salary schemes. These schemes also have to contend with inflation, which makes final salary payments in the future much dearer. They face rising costs from the good fact that on average people are living much longer. They also have had a poor experience over the last decade from investment. Shares have had a bad ten years in the UK, US and Euroland.
It is now fashionable to say pension funds should invest heavily in government bonds. These are said to be matching assets for a pension fund. Fixed income bonds do not of course go up in line with wage and pension increases, nor do they suddenly pay more as people live longer, so it is not strictly accurate to say they match the demands of a pension fund. Worse still, at current levels of income on these bonds pension funds get a poor return. The income on these bonds is very influenced by the low official interest rates, and by the heavy buying programme from the Bank of England designed to keep prices up and bond interest rates down. A company needs huge sums to buy enough income when rates are 3-4%.
It is no wonder that recently Unilever and Sheffield University have decided to give up or reduce the range of their final salary schemes, like many other employers. There is no quick fix. With a deficit the size of the current one no governemnt will rush to restore the tax breaks. Even if they did poor past investment returns and low bond yields make a pension fund risky for employers.