What's Wrong with Our Company Pensions

by Dr. Ros Altmann

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Our current UK final salary pension system is not fit for purpose.  You can contribute to your company pension for 30 or 40 years, or you can transfer thousands of pounds in from another scheme, and yet still end up with no pension at all!.  Scheme members and the public generally believe that their employer's pension scheme 'guarantees' to pay them the pension they have been 'promised'.  They have been led to believe that, after Maxwell, the Government has put in place proper safeguards to ensure that their pensions are well funded and protected by our pensions laws.  They know that the assets are held separately from those of the company they work for and that trustees (some of whom are nominated by the members) are looking after the funds on their behalf.  They also know that there is a certain 'Minimum Funding' level which their fund has to meet, so when they see that their fund is in 'surplus' on this measure, they assume (quite reasonably!) that there are enough assets in the fund to pay their pensions. 

But this is simply not true.  The Government's minimum funding level does not ensure anything like enough money is in the fund to pay the pensions that the employer has 'promised' the members.  If the employer becomes insolvent, the risk to members' pensions can be enormous.  There is absolutely no safety net for people who have contributed to their scheme loyally for many years, or for those who may be only days away from retirement.  The law says that the only people who are well protected are those who have already started drawing their pensions from the scheme.  This is the gross unfairness of our current system.  The law says that all the assets in the pension fund at the time when an employer goes bust must be given first to the pensioners and the independent trustees who are employed to wind up the scheme.  Only after these people have received all their money, will those not yet retired get a look in.  This means that, if all the money is used to pay the pensioners and administrators, the rest of the scheme members could end up with nothing. 

But no-one is warning members that this can happen.  Any other financial product you buy must carry a risk warning - employer final salary schemes don't have to.  Yet the possible range of outcomes is so wide and the reality of the situation is that the maximum you are likely to get from your employer's scheme is the amount that you have been promised.  But the minimum is zero, and there is no way of knowing in advance how much or how little you will get if the worst happens.  Some people may be willing to take this kind of risk, but others may not, yet no-one is giving them the opportunity to make an informed choice because no-one has to tell them what the risks are! 

Of course, most companies don't become insolvent and most scheme members have so far received the pensions they were expecting.  When they work well, final salary pensions are fantastic for members.  (Ask the MP's - they have a superb scheme).  But what if you are unlucky enough to be one of the people who is caught up in this situation?  Every other country has put in some safety net to protect people if their employer's scheme folds.  The UK hasn't.  But not only have we failed to provide any underpin to our pension promises, we have also failed to warn people that they are not protected!   

We need to explain to people that what they think is a pensions 'promise' is not something they can rely on in all circumstances.  But if we tell them this and leave the system as it is, people may pull out of employer schemes, or may refuse to increase their contributions and we may destroy company pensions, which is not something that we want to do.  It seems to me, therefore, that it is vital that, while warning people of the risks, we also introduce some protection.  Just like we have for banks, insurance companies, brokers and even holidays, we must have an insurance arrangement in place to guarantee at least some minimum level of pension to all members of final salary pension schemes.  If we don't, putting money into your company scheme will remain similar to putting money into one share on the stock market.  If that company goes bust, you could lose all your money.  No-one would recommend that you should rely for your retirement income on investing in just one single share on the markets.  Yet that is what our system boils down to for many people.  Pensions law does not protect pension rights at the moment and insurance is essential to spread the cost.  It will not be easy to organise insurance properly, but Government must get to grips with this as soon as possible, if it is to fulfil its obligations to protect people who have been encouraged to save for their future.

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