Pensions are something many of us only think about when it is too late. That may be changing with regular news items about failing pension funds and falling benefits, but I suspect the average 25 year old still doesn’t really think about what will happen when they are 70.
I don’t have personal experience of anything but the local government pension scheme. Over the years the performance of the funds was pretty good – it was certainly good enough to generate substantial surpluses in the boom years. Local Government employees paid the price for that good management, seeing the surpluses from those funds used to keep down the poll tax. While many fund managers resisted this they were eventually forced to do so by the Conservative Government of the day.
The purpose of the fund was of course to even out the impact of the bad years with the income from the good ones. Taking contributions holidays in the good years was supremely short sighted. It could be argued that this was a form of corporate theft, just as much as the pillaging of the Mirror pension funds by Robert Maxwell. After all the surpluses were generated from money invested by both employers and employees. When I joined the local government scheme in 1971, I paid around 6% of my salary and that was more or less matched by the employer’s contribution. No one ever offered me the chance to reduce my contributions – but nor did I want to.
The present problems are largely as a consequence of those short sighted decisions, forced on local council schemes by the Conservative government, but apparently seized on with great enthusiasm by private sector fund managers as shown by this TUC study (pdf).
A large number of companies have said that final salary schemes have become too expensive to run. It is true of course that pension costs have risen as a result of reduced investment returns, increased longevity and low inflation. But it must be remembered that in the recent past final salary schemes have been an inexpensive way for employers to fund retirement provision for their workers. Many employers have used fund surpluses generated by high investment returns either to reduce their contributions or stop paying them altogether for a prolonged period.According to Inland Revenue statistics between 1987-88 and 2000-2001 employers took contributions holidays or reductions with a value of £18.57bn. But in the same period just £1.13bn of surplus was used to reduce employee contributions or give employees a contribution holiday1. Of course in some cases scheme surpluses have been used to enhance members’ benefits but this is a minority experience. Only a small number of schemes have bucked the trend that surpluses should be used for contributions holidays.
It is striking how contributions holidays typically favour employers over employees. Overall just over 94% of surplus was used to either reduce employers’ contributions or give them a contribution holiday. Less than 6% went on employee contribution reductions, a ratio of about 16:1. This seems particularly inequitable when the shared responsibility of employers and employees for funding final salary schemes is considered. Based on NAPF estimates of long-term contributions to final salary schemes, employers account for 62.65% of the total contribution, with employees making up the remaining 37.35%2. In other words the split is roughly 2:1. It would seem fair that contributions reductions be split in similar proportions rather than the current 16:1 ratio.
You would think too, given all the horror stories about pensions that contributions holidays would be a thing of the past but apparently not:
Given claims that final salary schemes are costing too much now markets have turned down it is rather surprising to discover that contributions holidays (and the inequitable split in favour of employers when they are used) are still continuing for many firms. According to the NAPF’s 2001 survey in the year preceding year 28% of private sector schemes had an employer contributions holiday, and a further 18% had a temporary reduction in employer contributions. But of those schemes 88% left employee contributions unchanged.
I don’t know what the answer is going to be. Other things being equal it seems just that employees who have seen their contributions hi-jacked to improve share standings should be compensated. The problem now is that the deficits are so huge it is difficult to see how this can be done without driving the offending companies out of business all together.
There is a glimmer of hope – according to a recent report, the combined pension fund deficit of the FTSE 100 companies fell from £55bn to £42bn in the year to July 2004.
You can find the NAPF (National Association of Pension Funds) – “the leading voice of employer sponsored pension provision” - here
