Wrong with Our Company Pensions
by Dr. Ros Altmann
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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
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.
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!
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!
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.