Mutual Insurance for Final Salary Schemes – or Risk Warnings
by Dr. Ros Altmann
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Who is to blame for the crisis in final salary schemes? Some have suggested that the cost of our regulatory framework is the problem and conclude that the outlook for ‘properly regulated’ company pension schemes is promising. This analysis misses an important fundamental flaw in our system.
Reducing regulatory burdens cannot be likened to removal of the ‘Red Flag Act’ for motor cars. Pedestrians and drivers know there is a small chance they could be killed on the roads. They are aware of those risks whenever they go out. However, scheme members generally have no idea that their pensions might never be paid. They contribute loyally for years, often transferring thousands of pounds in from other schemes, believing official advice that a company scheme is the best type of pension and we should contribute to it, if we are lucky enough to have one. Sadly, this is not true, as thousands of workers like those at ASW or UEF have discovered the hard way. However much money workers have put in, the law only protects those already retired. In fact, one could liken our system to encouraging people to invest all their pension contributions into one share on the stock market. If an investment adviser recommended their clients to do this, they would be guilty of gross negligence.
Either people must receive a proper risk warning telling them that they might end up with no pension if their employer fails (which could mean they will not put money in!) or we must introduce a mutual insurance system as they do in other countries. The system would probably need to be underwritten by the Government, but the costs of this could be contained by limiting the amount insured. The insurance scheme could be designed to offer return of contributions, or protection of pensions up to some ceiling like £10,000 or £15,000 per year, or ensure longer serving members receive higher payouts. Any of these would be fairer than the current grossly unjust and morally indefensible system.