Defending Pensions during a Period of Economic Uncertainty
The Reasons for the Current Threat
. Employers have never been more sensitive to risk. Until recently it was part of commercial philosophy that a level of risk was necessary. Now due to economic uncertainty companies do not accept any risk, which means they are frightened of sharing the pension risk with their employees.
. Pensions are more expensive in the long term due to a marginal increase in life expectancy of those who reach retirement age and legislative changes to protect pensions and remove inequality. The major reason for rising pension costs in the short term, however, is the current chaos on the equity markets and above all the very low interest rates.
. Greed and opportunism of some employers to use the current situation to cut employees pay ie closing reasonable defined benefit schemes where the employer pays around 12% of pay roll and setting up defined contribution pension schemes where the employer usually pay less than 5%.
. Some companies in the pension industry are actively trying to persuade companies to change their schemes and are exaggerating the problems of defined benefit schemes. No new scheme, no commission. Having been prevented from mis-selling pensions to workers they have now targeted employers.
What Must Be Done to Defend Good Pensions?
. The 10 million workers who are still in defined contribution schemes should no longer be branded as lucky or as receiving a gold standard of provision. Average pay of our members is £16000 a year. If their pension is disrupted, and even if for only part of their working life they have to take on the full investment risk, then they risk having paid into schemes for very little return and poverty and reliance on the taxpayer through means tested benefits are likely to be the only options. The current good pension schemes are the minimum standard.
. Instead of MFR employers should be required to pay a sufficient contribution into pension arrangements, in current conditions this is likely to be around 10% of pay roll. Employers who do not share the investment risk with their employees should pay a higher contribution to reflect this.
. Membership of good defined benefit schemes should be compulsory for employees.
. Any changes to pension schemes should require full consultation with staff and their unions before implementation. The financial implications should be fully disclosed and there should be an effective appeals procedure to prevent unilateral action without consultation.
The Excuses for Closing Good Schemes
. Minimum Funding Rate- designed to offer protection it is urgently in need of reform. Its emphasis on dividend income is no longer relevant in view of the decline in dividend income caused by economic downturns and the removal of tax relief from pension funds on advanced corporation tax. Once reformed then it will no longer pose a threat to the continuance of adequately funded pension funds.
. FRS 17- is simply an accounting standard that sets out how the cost of pensions is shown in the accounts. It values assets based on corporate bonds which means it exaggerates the liabilities of most pension schemes that are funded in equities. It does not increase the costs of actually providing pensions although it could cause chaos and loss to funds in the future as they compete for corporate bonds and reduce holdings in equities. FRS17 must be reformed and/or suspended.
. Acceptance that a defined contribution scheme is a viable alternative to defined benefit schemes. The promotion of defined benefit schemes such as Stakeholder Schemes and the belief that low commission rates and ÔflexibilityÕ somehow creates a viable pension arrangement has given many employers the excuse they have needed.
Employees are not taking out Stakeholder schemes as their primary pension provision unless the employer is prepared to pay a sufficient contribution. With increasing thresholds for means tested benefits such as the Minimum Income Guarantee and a Pensions Credit that only partially excludes pension for the low paid, it is difficult to argue that they are good value for money.
The truth is the middle income group cannot afford to take on the full investment risk and the cost of annuities caused by low interest rates means defined benefit schemes are increasingly irrelevant.