Should we abolish final salary pension schemes?

Should we abolish final salary pension schemes?

August 3rd, 2009

Write down a list of numbers from 1 to 10. Then next to each number think of something with a corresponding level of controversy. So, next to 1 something fairly uncontroversial, such as that the Labour party will probably lose the next election. Now think of something to go next to number 10 – something that is about as controversial as you can get. Ohhh, sorry, forgot to mention. There is one more rule. These controversial statements must have one thing in common: that they are all probably about right. This weekend the Observer business section led with a story that ticks box ten. It really is about as controversial as you can get. The thing is though, the sentiments expressed are right on the mark. In fact, it is probably imperative that the recommendations are acted upon by a government, very soon. It is just that the hornets nest they will stir up will leave a legacy of fury. It all relates to final salary pension schemes. Should they be abolished? Or even more controversial, should recipients in these schemes be forced to forgo some of their hard-earned benefits? As you know, some companies are being paralysed by the deficit in the pension fund they control on behalf of their workforce. In some cases, it is thought that these deficits could eventually force some firms into bankruptcy. Last week, this column told how BT is suffering under the weight of its final salary pension scheme – with some now beginning to speak the unspeakable about the long-term implication of this on the company’s future. The problem is that for every penny companies put into final salary pension schemes, there is one penny less for other schemes. So in effect, final salary pension schemes are in danger of creating a two-tier system. There will be those who retire on a salary equating to two thirds of their final salary, and the rest of us whose pension will be dependent on how much of our hard-earned salary we have put aside. And as you know, for the last ten years or so, savings have been abysmally low. The Observer piece based its bit of scandal on the view of pension guru Ronnie Bowie. Apparently Mr Bowie reckons workers with final salary pension schemes may have to give up 10 per cent of their benefit. He said: “If we could wind back the clock, it would be better if all these schemes could be based on career average earnings and not final salary. Career average schemes have little effect on the incomes of the low paid and offer a fairer reward. They would also be more affordable for employers to run. But that didn’t happen.” The truth is, final salary pensions are an anachronism from an era when we had a job for life, and when the labour market was stifled by old thinking, and when the phrase “flexibility of labour” was a contradiction in terms. It was also a throwback to an era when an artificial step was placed between us and the real world. So we enjoyed these pensions without any real concept of their true cost. Mind you, abolishing the final salary pension award will go only a very small way to solving the underlying problem. The real underlying problem is not lack of savings at all. If we all were to save a lot more for our retirement, as common sense says we should, consumption would fall, and so would economic growth, and an unfortunate side effect would no doubt be higher unemployment. The long-term solution to the pension crisis lies in finding ways to increase the UK’s production potential, and that is dependent on two factors – a dynamic labour supply and innovation. Fix that, and longer-term economic growth will improve, and with that so will stock market performance, and as a result pension funds will perform a good deal better. Article author: Michael Baxter from Defaqto,to see more articles by the author go to: For financial advice call Mark or Clare at GMP Independent Financial Advisers LLP on 0207 2886400    

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