Sting in the tale - Left out in the cold
We have a real problem with our pensions these days, as employers have simply not been able to fund pension promises in a way that suits their particular businesses and the current economic environment. The biblical idea that assets should be stored away in good times so that hard times can be ridden out is one of common sense and applies in all walks of financial life.
Pension promises made by employers are long-term and the funds to back the promises need to take a long-term view too. But the way that employers put money aside to meet their future liabilities is now accounted for annually. Not that long ago, many final-salary schemes were running healthy surpluses because of buoyant investment markets. Those surpluses sparked plenty of speculation over who owned them, and many felt they should have been shared out among the members of the schemes in some way. Employers were given a stark choice; they could either improve the pension promises to their employees, or, subject to HM Revenue & Customs agreement, they could take the surplus funds out and pay tax at 35% on the withdrawals, or simply stop paying more money in (and getting tax relief on it) until things 'normalised'. This last option, a contribution holiday, was the route most employers took in the face of the then new legislation.
Today we have experienced a reversal of fortunes and many pension funds are in deficit. The first thing that is apparent in this new situation is the lack of speculation about who owns these deficits; most people seem to agree that employers do. I don't think there are any scheme members campaigning to get their fair share of any company's pension black hole.
Legislation has moved on to deal with this problem of missing funds just as it did when the problem was one of excessive funds. Under the new regime, pension black holes are not only seen as being bad, but there is strong agreement that something must be done about them. That's what employers are faced with in real life and it's little wonder that many of them have decided to throw in the towel and get out of providing final salary pensions. It's just too difficult and can be positively dangerous for a business to promise fixed benefits to its employees. It's far easier to just push the problems onto the employees through money purchase schemes.
In a different way, the same issues apply in the provision of state pension benefits. There is no fund building up in that case, but the 'problems' created by people living longer and the cyclical nature of real life will put similar pressures on future public finances. There too, we're seeing a change in attitude, where the state is looking not to provide pensions of a guaranteed level, but rather put in place a system that drops the problems on each citizen's shoulders. The proposed money purchase National Pension Savings Scheme is a result of this change in attitude. The main concern is not whether pushing responsibility onto individuals is a good thing (it undoubtedly would be for the state), but whether it is possible to do it on the cheap.
Either way, the future direction of both our company and state pension systems will be towards individual rather than collective responsibility.
However, all the recent U-turns by legislators in the run-up to the new tax regime from A-day have been made because of a worry that pensions will somehow be made too popular, people will pay too much money into them and, hence, receive too much tax relief. Indeed, the whole point of the new tax regime is to switch to a maximum lifetime savings allowance so we don't overdo pure pension savings.
But that whole approach has to be unhelpful when judged against the realities that face us. We're going to have to go it alone in retirement with much less help from employers and the state. You'd think the obstacles in the way of private pension saving would be removed rather than added to, wouldn't you?
First published in Pensions Week, 13 March 2006