What Has Happened To Our Pensions? - Ros Altmann

    Ros is a leading authority on later life issues, including pensions,
    social care and retirement policy. Numerous major awards have recognised
    her work to demystify finance and make pensions work better for people.
    She was the UK Pensions Minister from 2015 – 16 and is a member
    of the House of Lords where she sits as Baroness Altmann of Tottenham.

  • Ros Altmann

    Ros Altmann

    What Has Happened To Our Pensions?

    What Has Happened To Our Pensions?

    Has Happened To Our Pensions?

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)

    We used to have a pension system that was the envy of the rest of
    the world. This system is now crumbling and companies are moving
    away from final salary occupational pension provision. Not only
    this, but many thousands of people, who thought they had a
    ‘guaranteed’ pension and had been relying on their employer’s
    pension promise, have suddenly found that this pension has
    The Press have been trying to blame Gordon Brown’s removal of
    Advanced Corporation Tax (ACT) relief in 1997 for the problems, but
    this is simply not true.

    There are many, many reasons why our pension schemes are in trouble.
    It is not possible to point to just one or two factors.
    Responsibility is widely spread.

    The Tory Government, under Nigel Lawson’s Chancellorship, made a big
    mistake when it decided to tax pension fund surpluses in the late
    1980’s. These surpluses should have been allowed to build up, in
    order to cover schemes for times when markets turned down and/or
    when more and more people retired and needed to receive pensions
    from the scheme. Essentially, we have failed to let the surpluses
    build up and they are just not there when we need them.

    After this, successive Tory Governments piled on more and more
    costs, thinking pension schemes would always be able to afford to
    pay more out, because they still had big surpluses. Of course, the
    reason pension funds had the surpluses was because not many people
    were actually drawing pensions yet (there were far more people
    contributing than numbers retired) and also because equity returns
    had been unusually high and scheme assets had grown faster than
    expected. But the pool of assets was too tempting for politicians to
    resist. They kept wanting to pile more costs onto pension schemes,
    (partly perhaps as a way of hoping to reduce the future costs to the
    Exchequer of supporting an ageing population), but in the process
    making pensions more and more expensive for companies to provide.

    Then the Tories made the many mistakes surrounding the 1995 Pensions
    Act. This Act came into effect in 1997 and forced all employers to
    guarantee to pay fully index-linked pensions to all members (up to
    5%). On top of the many other mandatory requirements (like spouse
    cover, preservation and revaluation for deferred members etc which
    had been introduced over the years) this added enormously to the
    costs of providing pensions. The measures are all, in themselves,
    excellent for members but, by making them compulsory, there was no
    ‘safety valve’ in the system. If investment returns fell, or if the
    employer’s business was in trouble for a couple of years, they could
    not escape these extra costs.

    The 1995 Act also introduced the Minimum Funding Requirement (MFR)
    and regulations requiring more costs to prepare Statements of
    Investment Principles, pay for compliance and regulatory expenses
    etc. These measures again were intended to benefit members and make
    pensions ‘safer’, but added to the costs of running the schemes. In
    addition, of course, they had the terrible effect of leading people
    to believe that their scheme assets were safe if it was ‘fully
    funded’ on the MFR for example. The 1995 Act also introduced the
    iniquitous priority order rules, which mean people not yet retired
    can end up losing all their pension! No provision was made to
    protect pensions of those very close to retirement, or to protect
    monies transferred in from other employers’ schemes.

    Finally, of course, this Government removed ACT relief altogether –
    but this had already been reduced by the Tories during the 1990’s,
    so it is not entirely fair to blame all on Gordon Brown.

    Overall, successive Governments have conspired to make our pensions
    more and more expensive and legislation has made them less safe.
    Even though funding requirements were introduced and a regulator (OPRA)
    and an Ombudsman were set up to oversee the system, the law did not
    actually have proper safeguards to ensure people would receive the
    pension they were promised.

    Then we come to the role of employers. They too could not resist
    getting their hands on the tempting pool of assets sitting in the
    pension funds. They used these to hide the costs of industrial
    restructuring in the 1980’s and 1990’s, by giving people generous
    early retirement benefits (paid for by the pension scheme). This
    also led other members to expect to be able to retire early, which,
    of course, means that the pensions have to be paid for longer and
    longer, as life expectancy has continued to rise.

    Employers took contribution holidays. This is a real problem,
    because they should have kept paying in to build up assets to cover
    for times like now, when markets and investments go wrong, while
    more and more pensions still need to be paid. The employers relied
    on actuarial assumptions that showed equity returns would deliver
    strong growth consistently over time and, therefore, make the
    pension promises seem affordable.

    Which brings us to the role of the actuaries and trustees.
    Actuaries’ forecasts allowed schemes to take contribution holidays
    and trustees trusted their actuarial advisers to give them reliable
    forecasts of what contribution rates should be recommended to
    employers. If the actuaries said the employer could take a
    contribution holiday and still afford to pay the promised pensions,
    the trustees didn’t question this. They did not think to ask the
    actuaries, how it could be that there were more and more people
    retiring, the costs of providing pensions were rising, equity
    returns had been very strong and yet think this could just be relied
    on to continue into the foreseeable future. Equities should not have
    been relied on to keep providing strong returns. As markets rose and
    schemes became more mature, the equity component should have been
    reduced, but instead it was actually increased!

    In addition, people are living much longer and expecting to retire
    earlier and earlier. Pensions were never meant to last for 30 or 40
    years. Yet the pensions industry fooled itself into thinking that it
    could provide really good pensions with not very high contributions.

    Finally, of course, interest rates have fallen to very low levels
    and this has meant the costs of providing pensions – especially via
    annuities – has rocketed.

    All these factors have come together to leave us in the mess we are
    in today. You cannot just blame the Government, or the employers, or
    the actuaries, or the trustees, or the investment managers. The
    whole industry must share the blame and it is time to get real. The
    system is not working and must be sorted out, to help provide decent
    pensions for people in future.

    We have been deluding ourselves perhaps, to truly think that
    companies can afford these kinds of open-ended liabilities for ever
    without keeping aside enough money to pay for them. Especially with
    all the extra costs we have piled on over the years.

    I think the latest measures announced by this Government have been
    an excellent first step along the road to getting a better and safer
    pension system in place in the UK. If we are moving away from
    defined benefit and final salary schemes – which seems inevitable –
    then we must make sure we spend time to structure alternative money
    purchase arrangements properly, help people to think about gradually
    retiring, rather than suddenly stopping work in their 50’s and
    protecting people whose employers have promised to pay them a
    particular level of pension.

    Those who lost their pensions with no warning, while thinking they
    were properly protected by the law, should be compensated and we
    should make sure this does not happen to anyone else in future. We
    are closer to this today than we were last week and that, for me, is
    good news!

    Summary of reasons why pension fund surpluses have disappeared and
    are no longer there now that we need them:

    1.   Nigel Lawson decision to tax pension fund surpluses
    2.   Successive extra mandatory costs – preservation,
    deferred pension revaluation
    3.   1995 Pensions Act – MFR, priority order, limited
    price indexation
    4.   Removal of ACT relief
    5.   Employer contribution holidays
    6.   Employer use of surpluses for industrial
    7.   Trend to earlier retirement expectations
    8.   Increasing longevity
    9.   Actuaries investment and mortality assumptions too
    10. Benefit enhancements which could not be removed
    11. Maturing of schemes (i.e. more pensions needing to be paid as
    workers retire)
    12. Over-reliance on equity investment
    13. Trustees not questioning actuarial advice
    14. Plunging stock markets
    15. Sharply lower interest rates

    One thought on “What Has Happened To Our Pensions?

    1. Please post this on every street corner. Place the article in all pension newsletter. Teach it in school. Then stand bemused, blow out empty your lungs. Shake your head in disbelief.

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