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In October 2004, a government-appointed Pensions Commission published its interim report. This feature highlights some of the key issues raised in the report, and reviews the state of the debate about pension provision in the UK, including the views of trade unions and employers.
On 12 October 2004, the long-awaited interim report of the Pensions Commission was published. The Commission, set up following the government’s green paper on pensions in December 2002, will not produce its final report until autumn 2005, but publication of the interim report has stimulated a vigorous debate on the subject of pensions.
Britain has relied heavily on occupational pensions (TN0404101S), particularly final-salary or defined-benefit schemes, but these funds have faced big shortfalls after the 2000- stock market slump (UK0301109F). Between 60% and 70% of final-salary pension schemes are now closed to new members and more than 10% are closed to further contributions from existing members. According to the Financial Times (on 1 October 2004), employers and employees combined are putting on average only 6%-11% of earnings into defined-contribution or money-purchase schemes as against the 15%-20% of earnings which were put into final-salary schemes. 'Stakeholder' schemes, the government’s attempt to encourage low-income families to save for retirement (UK0103119F), have been branded a failure by the Trades Union Congress (TUC): three-quarters of company schemes are said to be 'empty shells' with no active members.
Closures of under-funded pension schemes have figured prominently in the news. Permira was forced to pull out of negotiations to purchase WH Smith, the high street retailer, after it emerged that the size of the company’s pension deficit (around GBP 220 million) was a significant obstacle to a bid. The threatened winding up of the UK arm of Federal Mogul, the car parts maker, with a shortfall of GBP 875 million, could result in around 40,000 current and former UK workers at Turner and Newall losing at least half of their retirement income. Meanwhile the government is facing claims from more than 65,000 workers who lost all or part of their pensions when their employer became insolvent. The growing number of insolvent company pension schemes is likely to significantly exceed the amount set aside by the government in its two safety net schemes - the Financial Assistance Scheme (which has only GBP 400,000 at its disposal) and the new Pensions Protection Fund (for those whose employer becomes insolvent after April 2005).
TUC general secretary Brendan Barber has warned that: 'People should not underestimate the depth of feeling among pension scheme members about the security of their benefits.' Indeed, September 2004 saw further strike action as workers who refuel aircraft at Heathrow, employed by AFS, mounted at 48-hour strike after rejecting a two year pay offer which, according to the Transport and General Workers’ Union (TGWU) failed to compensate their members for terms and conditions, such as pension provision, which had been taken away from them by the refuelling companies. A case is also being taken to the European Court of Human Rights against the UK government over lost occupational pension benefits by the union Community (UK0410105F).
The extent of the pensions crisis facing the UK has been highlighted by reports from a range of national and international bodies.
Finance directors, who are more influential than their human resource counterparts, regard pensions as a company cost, rather than a company benefit, it is reported. Moreover, it is not only finance directors in small and medium sized businesses who see little benefit to investing in workers’ pensions. Sir Peter Davis, former chair of Prudential and J Sainsbury who now chairs an employers’ taskforce on pensions, recently gave a bleak assessment of the current state of provision by employers. He said that, in general, finance directors are looking to offload the liabilities of final-salary and other defined-benefit schemes, putting the risk of pension provision on employees. Their focus is more short-term and market-driven and less about the long-term good of their employees and the workforce. Sir Peter is due to report in December 2004 on measures needed to increase the uptake of pensions at work.
In its interim report, Pensions: challenges and choices, the Pensions Commission warns that unless they pay more tax, save more or retire later, tomorrow’s pensioners face a 30% cut in their retirement income by 2035. If current levels of provision are to be maintained in real terms, an extra GBP 57 billion a year needs to go towards state and private sector pensions.
The Commission, chaired by the former director-general of the Confederation of British Industry (CBI), Adair Turner, concluded that some 12.1 million workers over 25 are not saving enough for their retirement, with two-thirds making no contributions at all. Two-thirds of male workers aged between 36 and 45 earning between GBP 17,500 and GBP 25,000 a year do not save enough. The position of women is particularly precarious. Women on average have contributed less to occupational pensions as a result of having lower-paid jobs with fewer working hours, and have tended to work in areas of the service sector where there has been less pension provision. Historically, the structure of the state pension system has also meant more women relying on their husbands for income during retirement, as their own basic state pension (BSP) income has been kept low. Some 69% of women receive less than the full amount of BSP against just 15% of men.
The stark findings presented in the interim report demonstrate that current pension choices are unsustainable. Although it has not yet made any recommendations, the Commission said that at least one of four 'unavoidable' choices must be made:
When the Labour Party came to power in 1997, it picked out particular groups for special attention in relation to pension help, notably the 5.5 million pensioners it considered to be living in poverty. Despite its critics, targeted support or 'means-testing' has certainly helped those on the lowest incomes. Nevertheless, indications are that some in the government now believe a change to means-testing should be considered.
The TUC has always advocated a high basic pension, without means-testing, linked to earnings. The CBI has also supported a more generous basic state pension (calling for an increase of GBP 20 a week). How such a rise might be funded is a key issue. The government has already ruled out raising taxes to fund a more generous state pension. The CBI and the Institute for Public Policy Research both argue for a rise in retirement age (to 70 and 67 respectively) to offset these costs.
The option of deferring the state pension until the age to 70, called for by the OECD report, has been ruled out by the government after angry protests from trade unions. Instead, the government has proposed that, in exchange for working until 70, workers will be offered an enhanced pension or lump-sum payment amounting to around GBP 5,000 for each year sacrificed. As Sir Michael Marmot, director of the International Centre for Health and Society at University College London, recently pointed out, the difference in life expectancy between the rich and poor rose from 5.5 years in the 1970s to 9.5 years in the 1990s. For those in low-paid, low-skilled and arduous jobs, the government may in effect be offering GBP 30,000 in exchange for no retirement at all.
Many employers also prefer employing younger workers. According to figures from the National Audit Office (NAO), people are already under-employed in the years before they get to 65, with a particularly sharp decline among men. Thirty years ago, more than 70% of men aged 60 to 64 were in work; now the figure is only 40%. The charity Age Concern argues that helping older people to work for longer will ease the pensions crisis, but that the government must do this by challenging 'ageism', making work flexible and preventing employers from forcing people out just because of their age. According to a recent British Chambers of Commerce survey, one in three employers believe that it is crucial to their business to have the right to retire workers at a certain age. Employers are lobbying to retain the right to retire workers at 65 or 70, whilst the unions want workers to have the right to stay in their jobs as long as they are competent. Reflecting these strongly polarised views, the government has yet to determine its approach to this issue, which is holding up the publication of proposals for UK implementation of EU legislation banning age discrimination, due to take effect in 2006 (UK0405102N).
Analysis of the arguments for and against compulsion will be a key area for the Pensions Commission to consider between now and the publication of its final report. According to the Commission, improving voluntary contributions depends on the 'levers' that can bring about big changes in the understanding, attitudes and actions of those affected by pensions, whether consumers or providers.
Some steps are already being taken by the government, albeit in a piecemeal way. One measure the government is to introduce, which according to TGWU deputy general secretary Jack Dromey 'should send a clear message to employers that the days of raiding pension funds and closing pension schemes are over', is to require pension schemes to have at least half their trustees nominated by members. This reform would in effect give unions and employee representatives a veto over attempts by employers to cut pension costs. In addition, government work and pensions secretary Alan Johnson has announced a GBP 3 million a year fund to help unions and trade associations deliver pension advice so that this is no longer left to companies. However, lack of clarity over financial services rules about pension promotion, which stipulate that only qualified advisers can advise on pension products, may hinder its operation. Another measure that is due to be adopted is to reverse the present situation whereby employees have to opt in to their employer’s pension scheme.
However, the TUC believes that it is extremely unlikely that further incentives would restore employer contribution levels to where they should be, let alone help expand pensions saving to the level that the Pension Commission says is required. Instead the TUC has been one of the strongest supporters of compulsory contributions to company pension schemes. It would like to see employers under a legal obligation to contribute to their staff pensions, starting at 4% of pay and rising to 10% over time. Employees would also be forced to pay into schemes, at around half the contribution rate paid by employers. This would be similar to measures introduced in Australia in 1992. Today, 95% of full-time employees in Australia have a company pension, compared with half in Britain. Approaching three-quarters of Australian part-time workers have a pension, compared with fewer than 15% in the UK.
The CBI has rejected calls for any compulsion on employers to pay into pension schemes, claiming that employer contributions have doubled to GBP 37 billion a year since 1997. Critics of employee compulsion argue that it would mean low-income workers putting a larger slice of their wages (they already pay 11% in national insurance) into a risky stock market-related private pension. They also say that: the Australian system has failed; the country’s overall savings level has dropped since compulsion was introduced; it does not provide an adequate level of retirement income; it has hurt the economy; and, in any case, the demographics of Australia are so different that it cannot provide a model for the UK. The TUC says that it is a myth that the savings rate in Australia has fallen and accuses 'vested interests' of blocking a proper debate on compulsion in Britain.
Changing both attitudes and behaviour will be at the heart of any successful pension reform. Retirement age remains a contentious issue. Company practices are often still based on outdated 'up and out' career models. Employers need to explore more flexible ways of retaining expertise. Issues of employee retention and motivation also need to move higher up the organisational agenda, although whether this is likely given the inequality of power between finance and human resource functions in most organisations is open to debate. Although the EU anti-discrimination legislation does not automatically sweep away company rights to a set retirement age, it is a signal to employers that public opinion is changing. A compulsory retirement age, rather than being seen as an erosion of the managers’ right to manage, can also be seen as an abdication of the managers’ responsibility to manage. As a recent editorial in the Financial Times explained, 'waiting for retirement to solve personnel problems is an easy option, not a cheap or efficient one'.
For the rich, the pension problem is not acute. At the top of the income scale, senior executives enjoy contribution rates into pension schemes sometimes twice as high as those enjoyed by the rest of the workforce. TUC figures suggest that the average accrued annual pension for a director of an FTSE 100 company is now almost GBP 170,000 - 26 times the average occupational pension. The debate on pensions reveals the gross inequalities in UK society, with too many people too poor to save. Whilst mass means-testing is clearly not sustainable, there is an argument that until lifetime incomes are fairer it may not be possible to avoid topping up the pensions of the poorest. From Chancellor Gordon Brown’s point of view, if there was leeway to raise taxes he probably would not choose to spend the extra money on giving better-off pensioners the same rate as the poorest whether they need it or not. The decisions that are made when the Pensions Commission produces its final report in 2005 will reflect deeply held attitudes towards the distribution of wealth and how much fairer or less fair society should be. (Helen Newell, IRRU)