FT letter talking about difference between funding and solvency standard

by Dr. Ros Altmann

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Shame on Jonathan Guthrie (April 6).  He should know better. The problem with our final salary pension system is not that Government has tightened regulation and finally introduced a protection scheme.  The real problem is that a proper protection was not introduced in the 1990’s.  What is the point of running pension schemes which promise great pensions, if huge numbers end up worthless? 

1 in every 100 members have lost their pensions.   This is far more than ‘bad news’ for the 85,000 people affected.  Because the UK state pension is too low, company pensions are a vital part of people’s retirement income.   Indeed, trusting citizens put their state pension rights into their employer scheme too, because they were told it was safe.  They are now far worse off than if they had never contributed to a private scheme at all. 

Mr. Guthrie has made the classic error of confusing scheme funding and solvency.  This is precisely why the post-Maxwell protections failed.  The Minimum Funding Requirement (MFR) was absolutely not a solvency standard – although the public was wrongly led to believe that it was.  In reality, the MFR was a ‘minimal’ funding standard, designed to help employers lower contributions in the short-term, at the expense of members’ longer-term pension security.  It is all very well for Mr. Guthrie to assert that pension saving is fraught with risks.  No-one ever explained that to members.  In effect, Government forced them to gamble their whole retirement income on one share, that of their employer.  Of course, they would never have agreed to contribute to such an unregulated, unsecured vehicle if they had known the truth, so Government decided not to tell them! 

Such dishonesty has led to a scandal far worse than Maxwell and, if employers are closing schemes because they are forced to pay up, rather than just hoping to be able to afford the pensions in future, then they probably should not be making these promises at all.  Better to understand the true costs sooner, rather than leaving more lives to be devastated later.

Yours faithfully,

Dr. Ros Altmann
Governor, London School of Economics

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