Times are a changin’
Pick up any newspaper these days and you’ll be left in little doubt that company pension schemes in the private sector are in serious decline in the UK, particularly the so-called ‘gold standard’ final-salary schemes. The national press has been full of yet more horror stories over the last week or so as some large household-name employers have taken the next, and inevitable, steps along the long road to shedding their pension shackles. The popular press, I suppose, can feign surprise and even outrage as company after company waters down or even closes down on its pension promises, but those of us in the industry can’t, or at least shouldn’t.
Final-salary pension schemes are now little more than a public sector perk, something I’ve touched on quite a bit over the last year or so, and something we’re bound to hear more about in the future as it winds so many people up I guess; it’s the private sector that’s bearing the brunt of our brush with the fiscal and political realities in the early 21st century. According to the TUC 1 only one in four private sector employees are members of ‘good’ company pension schemes and I think it won’t be long before that number falls away ever further from the high water mark set in the late 20th Century. It seems it’s all over bar the shouting.
There shouldn’t be too much of a surprise in this. For a long time now there has been a steady trend among companies making final-salary promises to exclude new employees from schemes. Today the vast majority of final-salary schemes in the private sector are closed to new entrants and the indications are that many of those left open to all employees are set to follow the trend. It is now the norm for companies in the private sector to operate final-salary pension schemes for their older employees and less generous money-purchase schemes for those employed more recently.
It can’t end there, of course. Closing a final-salary scheme to new entrants can only be regarded as the first step on a long, but fairly predictable, road that ends in the full closure of the scheme. Indeed, the longest route to that inevitable end would be to simply leave the scheme closed off to new entrants and wait for the last member in the closed-off scheme to retire and eventually die. At that point the final-salary scheme would die with them. The minute schemes close to new entrants, that’s where they’re bound to end up. All the final-salary schemes that are currently closed to new entrants are in their final phase. It’s simply a question of when and how the end will come, not if it will come. We shouldn’t be so comfortable when we speak about this trend as schemes being ‘just closed to new entrants’. A scheme that is closed to new entrants is closed, period. No new people are going into it. I know I’m beginning to sound a bit like John Cleese in the parrot sketch here, but when the last person in it has retired and died, the closed scheme will pushing up the daisies too. As soon as it closed to new entrants a scheme has no long-term future. The best prognosis is a long and protracted death.
Waiting for a slow and dignified death for a final-salary scheme, however, isn’t likely to be an attractive option for employers, particularly as they have lost control over the pace of funding for their promises over the last decade or so. Many employers are still bitterly criticised by trades unions for having taken so-called pension holidays when scheme returns were at an all-time high, but there were no other sensible fiscal options open to employers at the time. Now times are harder employers have been hit by new regulations requiring them to fund at much higher levels to rectify imbalances in their funding positions. Indeed, the Pensions Regulator has just laid down the gauntlet and insisted that pension scheme deficits must be put right as soon as possible, in practice this could be within ten years. It is little wonder so many employers have decided to throw in the towel at this point.
The next steps seem fairly straightforward to me. Rather than biting the bullet and closing schemes down for future accrual for the existing members, I would think companies will first go through the motions of reducing the funding pain if they can. The most obvious way to do this is to reduce the value of the final-salary promise either by decreasing the pension accrual rate, or by increasing the personal contribution of members towards the costs. Doing both might prove attractive to some employers too, particularly if they’ve been badly caught out by the timing of the funding music having stopped. Other employers will certainly take advantage of the changes in the last Pensions Act to get people to retire at 65 if they currently run a scheme retirement age of 60. Indeed, last week’s batch of news from the UK occupational pension version of the Alamo seem to bear this assessment out as this following extract 2 from the BBC News website demonstrates:
“Brewer Scottish & Newcastle has told its staff that they have to contribute to the company pension scheme. The final salary pension will remain open but workers will have to pay in 6% of their salary to stay in it. Staff who do not want to contribute will be offered membership of an alternative scheme where benefits are based on average career salary.
Scottish is the latest in a long line of firms to change its pension scheme in a bid to reduce costs.
In recent weeks, major employers including the Co-op, Arcadia, Provident Financial and Rentokil have cut back on their pension provisions. Employees in these firms face either paying much more into the workplace pension or seeing their final salary scheme mothballed by their employer.
At the same time, the Times newspaper reported that department store group John Lewis was considering raising its staff retirement age from 60 to 65.”
I’m sure we’ll be reading much about a combination of all three; lower benefits, higher personal contributions and longer working periods to qualify for a pension. But it’s not a new story, nor is the end in doubt. Final-salary pension schemes in the private sector have got smoke coming out of the back – they’re not going to make it back to the airfield. We need to face up to that and start to concentrate on what it is that’s likely to replace them.
24 January 2006
1. Brendan Barber's New Year Message – TUC press release 28 December 2005
2. BBC News "Brewer calls time on free pension" 19 January 2006
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