Pension Policy Moving in Wrong Direction – FT Letter

by Dr. Ros Altmann

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The confusion about pension issues continues. Your leader ‘Pensioning off Company Schemes’ (Aug 11) and Nicolas Higgins’ reply (Aug 13) fail to tackle the big picture. Private sector pensions have become too expensive, because pensions were never designed to last so long. As individuals start work later, expect to retire earlier, live much longer, and interest rates fall, the cost of old age support has soared.

It is inevitable that final salary promises will have to change and the sooner scheme members are warned about the reality, the better. To claim that insurance protection of pension rights is too burdensome is missing the point completely. If companies cannot afford insurance, how can they afford the pension promises? If they cannot afford the pension promises, why are they making them - and who is explaining this to members?

Ultimately, of course, it has to be the taxpayer that picks up the pieces. Either this will be by underwriting private sector schemes or by paying higher State pensions. The rest of Europe is forecasting huge rises in Government expenditure on pensions, due to the ageing population. However, the UK Treasury expects that our pension spending will remain around 5-6% of GDP for the next 40 years. This is politically impossible, given the decline in occupational and private contributions which is occurring. The sooner we wake up to reality the better.

The fact is that the UK pension system must change, or we are heading for much more poverty and lower growth. The ‘pensions crisis’ which has so far been denied by Government, will have to be addressed soon. The bottom line is that Government policy is relying on occupational and private pensions to finance a 40% rise in pensioner numbers, whereas companies and individuals simply cannot afford this. Our final salary schemes are buckling under the weight of legal, regulatory, demographic and asset price changes which have been thrust upon them in past years. Surpluses, which should have been left to build up to pay pensions in young funded schemes, were raided by Governments and employers. Scheme members have been promised generous pensions, official safety nets were put in place to protect pension rights (MFR, regulators, trustees) but most companies can no longer afford the promises they have made and the safety nets are full of holes. Pension costs have escalated way beyond those originally envisaged by employers. As schemes have become mature and market moves have exposed the folly of over-reliance on equities, all parties must wake up to the enormity of the problem. Shareholders are starting to focus on these open-ended liabilities. Average job tenure is around 5 years, but pensions often now need to be paid for 30 years. When these schemes started, the numbers were the other way round!

Officials seem to be driving pension policy forward, by looking in the rear view mirror. We must change with the times. Until we reform the State pension system, incentivise pension contributions properly and encourage gradual retirement, we will not make any headway. Clear vision is long overdue.


Dr. Ros Altmann
Governor, London School of Economics

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