The remorseless decline of pension funds


               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.


  1. Disorganised1
    April 17, 2011

    Amazing what 10 years of Labour rule can achieve.

  2. Stuart Fairney
    April 17, 2011

    Buying fiat currency government bonds for a pension fund is as intelligent as exchanging your cow for some magic beans.

    Incidentally, you don’t mention that the contracted out SERPS payments which Baroness Thatcher allowed in the 1980’s have now been abolished. I decided to contract out years ago and have a several tens of thousands of actual money in a private sector company which can’t change the law at will. Henceforth all I can rely on are the weasel words of politicians who will be long gone when I retire. Another one of Mr Brown’s changes I believe.

    In the words of a facebook page “Thanks Gordon”

  3. lifelogic
    April 17, 2011

    Pension schemes are just a tax efficient saving scheme. deferring income tax until retirement but now limited to £50K PA contribution. The government keep changing the rules so no one can trust the basis of the investment. The tax benefits are reasonable when young as the tax is deferred for a reasonable length of time. Later in life a deferral of say 10 years with the cost of running the scheme and potential rule changes make them less attractive. People with low funds should get better relief in later life.

    An overall fund CAP of with no annual limit would be fairest as not all can contribute regularly throughout their working life.

    The other problem is share performance has been very poor because directors have been able to grab what should be shareholders money. Shareholders need proper control over excess pay for directors (Fred Goodwin Style destroy the company and get paid a fortune too). Very poor economic governance by Labour and the EU, absurd employment laws which prevent free contracts between employers and employees. Expensive green energy schemes and the like interfering in free trade and an absurdly high level of taxation pushing business abroad and discouraging UK investment.

    What did Brown and Labour expect from his mad tax and waste policies? Finally a state sector (plus Fred Goodwin and BBC) tax on excessive pensions over say £1.5M POT size to catch the absurdly pensioned BBC and state sector/EU fat cats who have caused most of the damage. Quite a good tax as fair and very difficult to avoid.

    Also allow pension fund lending from pension funds direct to small business. This way business people can use the pension fund money in their businesses and avoid the currently rip off banks.

    1. lifelogic
      April 17, 2011

      The enterprise investment scheme now provided better tax breaks than do pensions (of 30% plus no capital gains) rather than just the tax deferment as in pension relief. Also only ties the money up for 3 years and has very investment high limits so long as you choose a good and honest scheme or arrange one with 3 or more friends. It is about the only way around the absurdly high current tax rates.

  4. Matt
    April 17, 2011

    Whilst the level of tax and poor Market returns were the main factors excessive fees imposed by fund managers also contributed. People need to be educated about how to invest for their own future in a relatively low risk way. I don’t expect government to provide the solution but they must surely help in educating people about their options.

  5. Brian Tomkinson
    April 17, 2011

    JR: “It is now fashionable to say pension funds should invest heavily in government bonds.”

    Brown probably thinks that is mission accomplished using private pension money to finance state spending (wastage).

  6. sm
    April 17, 2011

    Its not equality of misery its fairness about low earners taxation and council tax funded pensions when they cant fund there own pension say versus the CEO of a council.

    Final salary schemes in the public sector are a in some cases a generous future promise unfunded from today’s taxation or contributions. The answer is to fund them fully like private sector funds. cap them and ensure a level playing field for all.

    Its difficult to tax the capital value of a future promise in the same way as a a built up fund of private assets, which have had many regulated bites taken out on the way.

    As inflation bites, any sterling based cash funds pensions in payments not linked to inflation of non discretionary spend will pay. Why not just seize the funds to recapitalise the banks?

    1. Simon
      April 17, 2011

      Seizing the funds Argentina style eh ?

      Could happen to private pensions funds but will never happen to private sector or public sector defined benefits pensions .

  7. Electro-Kevin
    April 17, 2011

    I thought Norman Lamont set the precedent for meddling with pensions.

    There is no intention to create ‘equal disappointment’ within the public sector. This would be childish. It is merely iniquitous to expect private sector workers to provide a sizeable amount of taxation to fund public sector pensions whilst they are facing cuts in services and are – because of high taxation – unable to restore the depletion of their own schemes.

    We will find ourselves in a position where we are putting more money into other peoples’ pensions than we are our own. That cannot be allowed.

    Are we all in this together or are we not ?

  8. Frank H Little
    April 17, 2011

    Labour‚Äôs tax attack started the rot. Labour’s raid was certainly wrong – something that Liberal Democrats and Conservatives were united on at the time – but weren’t the first inroads into pensions – both in public and private sector schemes – made by a Conservative government?

  9. Simon
    April 17, 2011

    The solution is pretty simple John .

    Create a national primary pension scheme administrated by actuaries and fund managers designed to pay out at the level at which meens tested benefits kick in .

    Fund it by deductions from National Insurance (which should NOT be merged into income tax to legitamise it’s abuse as general taxation) .

    Then create a secondary pension scheme (private pension,occupational pension) which all public sector workers will be put in but which will also be open to private sector workers .

    Once everyone is in the same boat pensions will improve dramatically for everyone except public sector workers on excessive pensions .

    It would even help starve our parasitic financial service industry of money which has got to be a good thing hasn’t it ?

  10. Richard1
    April 17, 2011

    It would be desireable for more people to manage their own pension funds – especially public sector employees who are responsible for spending decisions of taxpayers’ money. If more people can see that their future living standards are dependent on the UK being a competitive, low tax, low inflation economy we will have more popular pressure for sound economic policy (as is now happening in the US). Final salary schemes, especially when funded by the taxpayer, are for this reason undesirable – potential recipients assume (wrongly) that their interests are best served by big spending governments. The Government should look at moving all public sector final salary schemes to a private basis – offering generous terms for lower paid employees to encourage switching. This will also put a cap on – and eventually eliminate – the off-balance sheet pension debt which is a long term black cloud on the horizon for the UK.

  11. Nick
    April 17, 2011

    It’s screwed. The real government problem is 6,800 billion of government debt and that excludes bailing out the 50% of the population with less than 5,000 in savings come their retirement. (Or earlier when they are on benefits)

    The sad part is that if you do the sums, someone on min wage would have been better off keeping their NI and putting it in the FTSE.

    For someone on median wage, 25K a year, they would have had a joint life RPI linked annuity of 20,000 a year, if their NI had gone in the FTSE.

    Instead governments, left and right, pissed it up the wall. They are still pissing it up against the wall. They will carry on doing the same, because of the debts they have run up and hidden off the books.

    John promised a doomsday book listing all the debts. I’ve put FOI requests in and the treasury is still hiding them.

    So Civil service pensions, it still using AA corporate bonds as the measure, when it has no investments and CPI is the correct measure. The reason, it hides the problem.

    State pension – no figures

    State second pension – no figures

    PFI – still hiding although its starting to leak out.

    Nuclear decomissioning – still hiding

    Bank bailout – hiding the share trading losses. Expected losses on the guarantees are there if you no where to look. Page 100 plus of the BoE accounts. Standard trick that one.

    Until there is a doomsday book of debt, prosecutions of people like Brown and Civil servants at the treasury for Fraud, and a debt tax, its going to carry on.

    So the question is what can you do?

    Answer, get your money out of the reach of any UK politician. They are going to take it to keep the Ponzi going.

    Reply: I published revised UK debt figures on several occasions. The official figures have now been revised up substantially to include bank obligations.

  12. Tedgo
    April 17, 2011

    Pension funds used to invest in guilt edge security’s, if the Government wanted to build new hospitals it would issue bonds which pension schemes bought. It provided a useful safe return. That has mostly gone nowadays, the PFI’s providers now get all the cream. Why pension funds don’t get into PFI’s directly for the benefit of the members is beyond me.

    Back in the mid 80’s I had a transfer sum to an personal pension fund when I left a company. To get the equivalent benefits the pot needed grow at 7.5% every year with a similar annuity interest rate. With hindsight such rates are unrealistic.

    I was about to convert one of the pots to an annuity when the crash happened. The pot value dropped 35% and has only just recovered 3 years later. What is amusing is that it is a protected contracted out fund, had I put it back into Serps it would be giving me twice the pension than the annuity will provide. Successive governments have let the pension providers off the hook regarding the protected contracted out aspects.

    What is needed is the Government should legislate that pension companies should guarantee a minimum return on pension saving funds of at least 2 to 3% above RPI. This would be perfectly viable as pension money is long term and only perhaps 3% of members retire each year.

    Reply: How could anyone guarantee 2-3% above prices when index lilnked gilts only offer under 1% real?

    1. Tedgo
      April 18, 2011

      I don’t understand your comment about 1%, if you look at the market data on the BBC web site today, rates range up to 9% with many bonds in the 4 to 5% range.

      I believe the wealth of the nation is being corralled by a small group of organisations, the banks with their massive profits and bonuses, the people who finance PFI’s and the hedge funds. Pension funds don’t seem to be able to partake in this wealth any more, the trustees seem hell bent on gambling peoples pension savings on the stock market. My pots have seen 3 crashes in the last 25 years.

      We need to protect the average pension saver from the wild short term variations in pension fund investments. People really don’t choose when they retire, it either at a given age or through redundancy. This is why I think pension funds should have to guarantee a real return.

      This already happens with ‘with profit funds’, though it manifests itself with a large final bonus. The bad aspect of the final bonus is that it is arbitrary and is not necessarily paid if you transfer your fund to another scheme.

      Historically, for 50 plus years, pension funds have provided at real return of 2 to 3%. There’s no real reason why they cannot continue to do so in the future.

      Reply: Bond rates are nominal rates – you need to knock inflation of 5.5% off them at the moment. I was quoting real yields on index linked bonds. Future returns may well be 2-3% on a balanced fund, but it cannot be guaranteed.

    2. Simon
      April 18, 2011

      John , as you correctly point out nobody can guarantee such returns so why does the taxpayer have to do it ?

      The public sector SCAPE (‚Äėsuperannuation contributions adjusted for past experience‚Äô) pension guarantees real growth of 2.8% .

      The premium over the “risk free rate” which you quoted is1.88% ( ie 1.028/1.009 = 1.0188) .

      1.88% does not sound like much but compounded over 25,35 or 40 years it means that current employee and employer contributions to public sector pensions are not even covering two thirds of the true cost .

      John Hutton in his kludged report mentioned that discount rates should be reviewed .

      The choices appear to be to increase contributions now by a third or reduce pension benefits by a third or some combination or some combination of raising contributions and lowering benefits .

      Why can’t the public sector be moved into a money purchase system please ?

      This would have the effect of improving the performance of pensions for everyone , public and private sector as the public sector would not accept the derisory performance and high charges of current private pensions .

      1. Simon
        April 18, 2011

        PS With people living longer the sensible solution is for them to spend less during their working life so I prefer raising contributions .

        Simmilarly should be raised accross private sector too .

    3. StevenL
      April 18, 2011

      How could anyone guarantee 2-3% above prices …

      I know, the government could guarantee it with their magic printing press!

  13. oldtimer
    April 17, 2011

    The Conservative party gave up on the idea of reversing the Brown pension tax a long time ago, while still in opposition. I know this because I lobbied successive Shadow Chancellors about it from 1997 onwards – they seemed to come and go in quick succession. It is now obvious that the final salary scheme is as dead as a doornail. Undoubtedly it was one of Brown`s most cynical, destructive and unforgiveable acts as Chancellor.

    From my experience mature pension funds invest in bonds, and short dated gilts in particular, to cover expected maturities in the short run (where short equals the next several years). This provides more secure cover for those needs than the more volatile stock market investments.

    Reply:Yes, the Conservatives did give up the idea of reversing Labour’s tax increases on pensions, as research showed reversal would be insufficient to bring forward new final salary schemes.

  14. StevenL
    April 17, 2011

    I work at the council and I resent the attack on my pension. The going rate to get a private contractor to do my job is more than double my gross wage + pension contribution + employers NI. So if you accept my job is necessary (and some may not, which is fair enough) the taxpayer is getting a pretty good deal.

    The reason council pension schemes are a mess is threefold:

    1) Throughout the local government reorganisations of the 80’s and 90’s they gave people loads of money they were not entitled to as a sweetener. People were allowed to ‘retire’ aged 50 on a pension based on 40 years contribution. Most of them all came back to work after the reorganisation as consultants too.

    2) This idiotic zero-interest rate and QE policy. It strikes me that the idea is to bail out people’s property investments by stealing their pensions. It stinks, they should have let the housing market correct and bondholders lose their money.

    3) Incompetent and greedy fund managers.

    However, having said all this, I would quite happily sacrafice the defined benefit element of my pension providing I can keep the 13.5% employers contribution and put it in a SIPP, well away from the politicans, bankers and insurance companies.

    1. Simon
      April 18, 2011

      StevenL ,

      You sound like the sort of guy who can manage a SIPP , most people cannot .

      The charges on mine are 0.005% per half year which works out to 1.010025% per year – not trivial .

      For the country to prosper I think it would be better for you to spend your time specialising in what you do and me specialising in what I do rather than having to spend hundreds of hours learning about pensions and investments .

      Even though you sound like you are providing excellent value for money I don’t think that a scheme open to only public sector workers can be justified .

      Surely they should be closed and replaced with schemes open to both public sector and private workers ?

      I do not think that pensions provision for the majority will improve until everyone is in the same boat .

      Completely agree about the housing market . You mention greedy fund managers , well overpriced houses also cause people to pay too much towards the financial services industry – money they will need in old age .

      1. StevenL
        April 18, 2011

        The only way you can have the employers contribution in LA’s is to pay into the LGPS, which is a good value scheme (really good value at these interest rates). There is no choice in the matter.

        The other inequity with DB schemes in the public sector is that 1 years contribution aged 21 buys the same entitlement as it does aged 61. It’s the 21 year olds that are going to pay to bail out the 61 year olds though.

        1. Simon
          April 19, 2011

          Sorry I don’t understand what you mean by it being the 21 year olds who will bail out the 61 year olds , can you enlighten me please ?

          Another iniquity of defined benefits schemes is that they are guaranteed by other than the beneficiary . I think this is a symptom of the unfunded pay as you go nature of things .

          John Hutton’s report practically enshrines the DB element of future taxpayers being responsible for the shortfall and that is indefensible and must be stopped .

          Overall the ratio of employers and employees contributions as a proportion of lifetime earnings is IMHO close to what is right and a slight tailoring down of benefits can be achieved to make them viable – the biggest benefit is an extra 15 years on planet earth .

          Companies like Saga have built themselves up on the back of pensioners who have retired with serious money . The Wallace Arnold model would appear to have more in common with the retirees of the future .

          Overall , public sector pensions are a massive red herring .

          The Elephant in the room is that three quarters of the private sector will have next to no income by the time they find it impossible to get work (some time before they might otherwise choose to retire) .

          Even if they were contributing the same percentage of lifetime earnings they would only get a fraction of the benefits .

          1. StevenL
            April 20, 2011

            Well, 21 year olds benefit from 45 years of compound interest, whereas 61 year olds only 4. But both buy the same 1/60 salary entitlement.

            The 21 year olds will pay an extra 3% salary contributions to the LGPS to make up the shortfall, while the 61 year olds walk away scot free.

          2. StevenL
            April 20, 2011

            Even if they were contributing the same percentage of lifetime earnings they would only get a fraction of the benefits

            Yes, but that is mainly because of low interest rates. The same low intrerest rates have made the same people rich on the back of high house prices – which is what most of them wanted.

  15. Mike Stallard
    April 17, 2011

    England is now a poor little country living off its fat. there are far too many people (like me) living off the State and far too few people out there making money to provide GDP.

    Our pensions, like our pot holed roads, our inefficient and bloated Civil Service, our rotten Welfare State and our minimalist Armed Forces are getting third world. Surprise! Let us see what the future generations of Commonwealth Immigrants and EU Nationals make of our little country shall we?

  16. Simon
    April 17, 2011

    As people are living longer they will have to spend less during their working life .

    This should be another pressure driving prices of housing down which is neccessary to make life more affordable in the UK .

    Households with 2 wage earners or those that inherit should be OK .

    A person of 30 years of age who stays single and earns an average salary will be unable to make enough money during their working life to last them out .

    Distribution of money has been so concentrated towards the super rich that the sums no longer add up for the working class or lower middle class which together make up more than 50% of the population .

    Thes same people who have enslaved us and our children into debt need to return our money . I think we all know who they are .

  17. NickW
    April 17, 2011

    In mature economies there is very little wealth generation, there is only redistribution.
    Stock exchanges, commodity funds, or whatever, the losers pay for the winners.

    It is simply not possible for the whole of the population to fund universal pensions from the proceeds of investment.

  18. forthurst
    April 17, 2011

    Both the Dot Com bubble and the recent mortgage swindle were orchestrated by Wall Street: they ramped up worthless stocks (the new paradigm) and shorted them down: they ramped up worthless securities ((synthetic) CDOs) and shorted them down. They have computer programs in place designed to give legitimate market participants a haircut every time. Gilts are a bad store of value by design. What is happening is extremely simple: people save their money and then other people steal it. Throughout the Western world there are problems with pension schemes. Unless the financial industry is stopped from committing piracy with impunity, the future for old people and the public finances is dire. Before the latest crash, Wall Street and associates accounted for 40% total US corporate ‘profits’: that leaves practically nothing for savers and little for businesses that actually add value.
    The situation seems very clear: we have a lot of good businesses, yet it is very difficult to use investments in them to create a store of value for the future: that simply is not right

    1. StevenL
      April 18, 2011

      What is happening is extremely simple: people save their money and then other people steal it.

      Most people tell me I’m paranoid when I tell them I trade my own savings to stop bankers and politicans stealing them. I think you’re right though.

  19. Mark
    April 18, 2011

    Brown’s taxation of pensions wasn’t limited to fiddling with ACT relief – it also included haircuts for funds that were deemed overvalued because their investments had been successful – or were bubble valued. Sensible actuaries might have considered such funds could afford a contribution holiday, but would not use the temporary investment success to enhance payouts beyond well established norms.

    Willetts’ book “The Pinch” tries to sell the lie that baby boomers have excellent pensions before the first of them had reached 65 years of age. The reality is a pinch of pension funds to finance overspending and overlending. Brown’s wheeze of forcing pensions to invest in gilts and bonds leaves them open to large capital losses when interest rates begin to return to market normality. Should we wind up in a similar condition to PIIGS, there is the added risk of default. In the mean time, an inflation linked pension annuity doesn’t even return the capital sum in real terms unless you survive well into your 90s – way beyond the most optimistic of expectancy projections.

    Pushing pension funds into bonds has placed pensions at great risk – but it has also crowded out equity funding. Much of the money has gone into inflating property assets rather than creating new assets and businesses to generate real wealth and a real return. The process of re-balancing the investment portfolios of funds risks substantial losses for the funds and for the banks that had come to rely on this source of funding for their property loan books. It will turn out that somebody else’s house is not your pension. Brown’s measures make other pension mis-selling incidents seem like stealing sixpence from the Sunday collection.

  20. REPay
    April 18, 2011

    We still have some of the best pensions in Europe – providing you are in the public sector. We, the taxpayers, are building up the equivalent multi-million pound liabilities for all the senior posts in Whitehall, and after the years of Labour binge and prizes for their public sector friends the position continues to deteriorate. The average private sector pension pot for money purchase is 27,000. With inflation at 4%, fund management fees at 2% and Gordon’s tax on dividends still in place we are damned…I would have made the public sector start to invest. The civil service and our political class is so cut of from our situation that we can expect little help. (JR and a few others excepted!)

  21. Alf Oldman
    April 18, 2011

    The rot started when George Brown, as Chancellor, decided to raid pension funds

  22. alan jutson
    April 18, 2011

    Pension funds.
    Poor performance by equity market, poor performance by fund managers, high annual fees, constant rule changes by politicians, ever changing regulations and tax rates limits by politicians, which move the goalposts over the years, poor annuity rates, inability to access own funds in an emergency. Poor performance of regulation by FSA (miss selling and audits)

    It seems if you invest in your own personal pension fund, everyone gets a better benefit, and a larger slice of your money, than the person who is paying.

    Those who are getting employers paying a contribution of 13-14% of their salary on top of their own personal contribution, do not know how lucky they are !!!

  23. HJ
    April 19, 2011

    John Redwood seems to equate pension funds with final salary pensions (e.g. where he says that only 21% of private sector funds are now open to new members).

    In fact, the most common type of private sector fund is the money purchase scheme and it is the people in these schemes who have suffered most from Brown’s tax raid. Money already put into these schemes on the understanding it wouldn’t be taxed, was taxed, significantly reducing the size of the annuities that can be expected.

    Unfunded public sector schemes (the majority of public sector schemes) were totally unaffected. I fail to see why existing public sector pension promises have to be honoured while the money already invested in private sector schemes under a similar promise (i.e. no taxation) can be raided by the government.

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