John Cranage: The great pension betrayal
Aug 6 2009 by John Cranage, Birmingham Post
If economic historians ever manage to cut through the fog of spin and hype and develop a clear picture of just what has been happening in Britain over the past decade the story of the destruction of the country’s occupational pensions will surely rank as one of the biggest betrayals of trust ever.
Many who have faithfully and trustingly paid into their company schemes are now finding their retirement income falling far short of expectations.
Companies that offer final salary pensions – traditionally the Rolls-Royce standard – have always had to contend with the risk of ensuring their underlying investments, or assets, matched their long-term liabilities. But what increasing numbers have not been able to contend with is the ever-increasing burden of the costs imposed on pension schemes by central government and the red tape of the regulators.
Gordon Brown kicked away a major prop in 1997 when he scrapped tax relief on dividend income, an important element of any scheme’s income. The compounded shortfall in equity income since then runs to many, many billions of pounds at a time when stock markets have been at their most volatile since the early 1930s. Add to that the fact the accountancy authorities have forced companies with final salary schemes to crystalise increasing long-term liabilities on their balance sheets and those schemes that survive are heavily levied to meet the cost of those that fail, and it is little wonder that so many have shut.
In fact, as the actuaries Lane Clarke & Peacock have pointed out, there are now just three FTSE 100-listed companies keeping their final salary schemes open to new employees.
All credit to Cadbury, Tesco and Diageo for that. But how long it will be before they bow to the inevitable and close them to joiners remains to be seen.
My guess is it won’t be long. As LCP points out, the defined benefit funding gap facing the country’s biggest quoted companies is, at £96 billion, the biggest ever. Many schemes have, quite sensibly, disinvested from equities in an attempt to match their assets to their liabilities. But those that have are by no means out of the woods, because the yield on corporate bonds by which liabilities are calculated have fallen along with share prices. Another huge problem scheme managers and trustees face is their actuarial assumptions have been knocked into a cocked hat by the fact pensioners are now living far longer than their predecessors did.
You can’t blame government or the regulators for that, admittedly. The irony, however, is that this surge in longevity is probably due in some measure to the anti-smoking drive.
In other words, be healthier and live longer but be prepared for comparative poverty in your old age.
