Living up to expectations

Living up to expectations

With more questions than answers surrounding the pension crisis, what is the state of play?

Few would deny that Britain faces a pensions crisis. Less than half the
private sector workforce now has any retirement provision other than an
inadequate state handout and pensions have become a battleground between the
government and the individual and between the private and public sectors.
Business is caught in the crossfire.

The final report from Lord Turner’s commission has captured the headlines and
rightly prompted a national debate about how a civilised country should fund a
dignified retirement for a fast-ageing population. Despite widening its original
remit considerably, however, it raises just as many questions as it answers.

Lord Turner’s conclusions are simple but far-reaching. Increasing longevity
means the status quo is unaffordable. As a country, we need to work longer and
save more. The question is who should pick up the tab?

The issue of delaying retirement has already driven a wedge both between the
public and private sectors and between centrally employed government workers and
their peers in local councils. Private sector employees who face the prospect of
working into their late sixties look on in amazement as the public sector clings
to its right to a taxpayer-funded, index-linked retirement income from the age
of 60.

Thorny issue
The issue of who should stump up the extra savings looks just as
thorny. The Turner report proposes that the pain should be shared between
employers, workers and the tax-payer. If adopted, the scheme would see payment
into a planned national pensions savings scheme on the basis of 4% of salary
from the employee, 1% in the form of tax relief from the government and 3% as a
quasi-compulsory contribution from every employer.

Enrolment into the savings scheme would be automatic unless the employee
opted out, but the evidence is that nearly all workers would end up in the
scheme, if only through inertia.

For companies still offering defined benefit retirement schemes and the
larger number now contributing into money purchase pensions for their workers,
the proposed minimum contribution is not an issue. If anything, it opens the
door for some employers to reduce contributions in the same way that the move
from final salary to defined contribution legitimised a lower company payment.

Hewitt Associates, a pensions adviser, has calculated that employers who
currently pay an average of 7% of salaries into defined contribution schemes
would have to reduce that to the minimum 3% to keep their costs level. A third
of all employers, Hewitt says, would see their contributions rise five-fold or

The reason is that only half of all workers take advantage of defined
contribution pension schemes and many employers are happy for things to stay
that way. They see no benefit in providing generous pensions and some question
why they should be expected to fund what in many countries is seen as a state

For the many companies, which currently offer no pensions to their staff, the
proposals are seen as yet another attack on their viability from a government,
which has already used private sector employers as a soft touch for a catalogue
of stealth taxes.

David Frost, director-general of the British Chambers of Commerce, says the
‘soft compulsion’ of the employer’s contribution is a step too far for small
companies already struggling with the growing costs of red tape and higher fuel
and energy costs. ‘Small firms will be particularly badly hit and businesses
continue to tell us they would have no option but to reduce salaries and lay off

The Confederation of British Industry agrees. According to deputy
director-general John Cridland: ‘Compelling firms to contribute to pensions
would jeopardise jobs and growth.’ Deloitte has estimated that compulsory
contributions could cost employers an extra £2.3bn a year.

Lord Turner says he is mindful of the extra burden on business, but his final
report in April stuck to the broad thrust of November’s interim proposals. A
matching minimum contribution is ‘essential for the architecture of the whole
package’, he concluded.

His position is, not surprisingly, taken up by the unions. Brendan Barber at
the TUC says that without compulsory contributions: ‘there will be no prospect
of delivering a decent standard of living for future pensioners, given the
retreat by employers from good schemes.’

Recent comments from John Hutton, the work and pensions secretary, left
businesses leaders in no doubt about the government’s ‘direction of travel’. He
told a Federation of Small Businesses conference in Manchester that government
had to govern in the interests of the whole community. ‘We cannot ever hope to
pretend that there is no conflict or tension between all those who have a stake
in the key issues that we face.’

Companies that have been struggling with the spiralling cost of final salary
pension schemes will be forgiven a rueful ‘welcome to the club’. With some
justification, they will view a 3% pension contribution as small beer compared
with the catalogue of headaches they have faced over the past 10 years or so.

They have coped with the Tories’ minimum funding requirement and Gordon
Brown’s £5bn year tax raid, only to be driven by their advising actuaries into a
scramble after a hopelessly insufficient stock of long-dated bonds and by the
pensions regulator into plugging short-term, and probably over-stated, deficits.

FDs under Pressure
Finance directors, some of whom are estimated to be spending a quarter
of their time dealing with pension issues, are under pressure to divert
ever-growing proportions of their free cash flow into the pensions they sponsor
at the expense of investment and productivity. In extreme cases, such as
Armstrong Group, a subsidiary of engineering company Caparo, the actions of
pension trustees have forced businesses into administration.

It is not all bad news. Companies like BA and BAE have sat down with their
unions and are thrashing out solutions that will see the pensions pain shared as
fairly as possible by their owners and workers. Staff learn to live with less
feather-bedded retirement arrangements while shareholders take an upfront hit to
put schemes back on an even keel.

Now that small businesses are also having to play their part in solving the
pensions crisis, the private sector has a right to expect the public sector to
follow suit. The government could do worse than start with a review of the
gold-plated pension scheme enjoyed by members of parliament.

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