We’re all being told we’re facing a pensions crisis. How serious is
Nick Edmans: There are grounds for concern in many respects.
Are people putting enough aside? We all know there are probably a lot of people
out there, who may find that in retirement their standard of living is not going
to be anything like as high as they might have thought. The only solution for
them will be either to put more money aside, if they’ve got the time to do so,
or to retire later, if they haven’t got time to do so.
The other issue, which is often described as the pensions crisis, is the
issue of the funding in defined benefit schemes. We have had a situation for a
number of years where the vast majority of defined benefit pension schemes have
been in deficit.
And prior to the new legislation that came in with the Pensions Act 2004, we
have had quite a lot of very unhappy cases where businesses became insolvent,
leaving those deficits uncorrected.
Stephen Yeo: The impending crisis is more one resulting from
the demographic change in the UK. This affects both government and private
Basically, by 2012, the number of individuals in the UK over the age of 40
will exceed the number under the age of 40 for the first time. That situation
will get progressively worse up until 2025, when there will be far more people
holding the vote who are of retirement age than there will be people of working
age for the first time in a long time.
We need to make it easier for employers to adopt working practices that help
people to work longer. The biggest choice that individuals have to make is
whether they are prepared to close that funding gap themselves. Because the more
they rely on the state, the more likely it is that they’ll be working for longer
than they are currently.
What changes will we have to see to turn things around?
Stephen Yeo: The Pensions Commission had a good look at
whether there was a crisis, and its view was there wasn’t one now, but there
would be one unless people changed their behaviour. So people do have to adjust
their behaviour on whether they’re saving for their own pensions.
The one thing about final salary schemes is they do have a big challenge to
face and there are a lot of different deficits there. It looks as if there is
going to have to be about £10bn more put into pension schemes over the next
decade to top up the deficit. It’s a lot of money.
For some companies that will be affordable and they’ll be able to do it. But
a significant minority of companies, which may be as many as a quarter of the
companies running defined benefit pension schemes, are going to have a real
struggle finding that money. The evidence I have seen indicated that it was
smaller companies where their schemes were less well funded.
What does all this mean for finance directors?
David Fairs: There are a lot of finance directors out there
who would see this very much as a crisis. It’s very interesting that
responsibility for pensions seems to have moved heavily from the HR front, where
pensions were around to provide people with a decent income in retirement, to
actually managing a debt that falls on the employer.
If you went back 10 years and tried to look forward, could we have envisaged
all the things that have actually come to fruition in the last few years? I
don’t think we could. I think it is a case of the perfect storm, which even with
the best foresight in the world, I don’t think you’d be able to predict that
we’d be in the position we are in today.
What’s to blame? Is it FRS17 or is it Gordon Brown’s raid on pension
schemes? Or is it a lack of trust on pensions generally?
Steve Folkard: I don’t think it was particularly sensitive
to remove advanced corporation tax credits at that time. It’s a contributing
factor in making the terms for those schemes worse than they would have been.
But it was only a contributory factor.
There’s a lot of other factors to take into account to understand why schemes
are in the position they are. But an insensitive move, and one that the
government has probably regretted and found difficult to justify.
David Fairs: I think there has been a need to recognise
these sorts of promises and obligations that companies have made toward their
pension schemes. I think you need to do that in a manner which is consistent and
transparent, in order for shareholders to compare the promises that different
organisations have made.
It’s unfortunate that FRS17 came in at a time when there were very
significant deficits. Mechanisms that look at the obligations that pension
scheme’s are measured by, in a consistent way, would be a good idea.
This week’s experts
Stephen Yeo, senior consultant, Watson Wyatt, a leading
provider of human capital and financial management consulting services.
David Fairs, partner in KPMG’s pensions practice and
chairman of the Double Century Club, an amalgamation of insurers, pension
managers and consultants involved in international benefits.
Steve Folkard, head of pensions and investments at financial
protection specialist Axa.
Nick Edmans, head of communications, The Pension Regulator,
the new regulator of work-based pension schemes in the UK.
Chaired by Damian Wild, group editor in chief of
Accountancy Age and Financial Director.
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