The rise in cost of public and private sector final salary pension schemes between 1990 and 2010 has very little to do with people living for a few years longer…
The real cause of the 'pensions crisis': ageing capitalism, not an ageing population
WORKERS, OCT 2010 ISSUE
In 1990 a final salary occupational pension fund could provide a member with a pension at age 63 of £15,000 a year at a cost to the fund of £100,000. Today to buy the same pension of £15,000 a year as in 1990 would cost around £270,000.
At this point we normally have to read or listen to the piffle from a so-called pensions expert or lifestyle specialist rambling on about how the rising cost of pensions is due to us all living longer. A statement akin to a sugar-coated bullet follows, to the effect that workers have to accept a massive pensions downgrade and work to age 68.
Let’s just nail this longevity sophistry once and for all: the rise in cost of public and private sector final salary pension schemes between 1990 and 2010 has very little to do with people living for a few years longer. The cost hike is primarily due to the way pensions capital requirements are linked to the changes in the yield of “gilts”, the bonds the government sells to fund its debt.
Yields have fallen from around 15 per cent in 1990 to a record low in June 2010 of 3.33 per cent. It is this drop in yield together with the way that final salary pension funds now have to be costed that has led to the current stage we have reached.
Funds grabbed
First, in 1997, the Labour government and its myopic accountancy friends grabbed £5 billion a year from pension funds by scrapping the tax relief on dividends paid into pension funds. Then, two years later, it forced final salary pension funds to be costed on a market related basis.
By forcing this stance it knew full well that the ongoing decline in gilt yields would in turn produce the scary deficit figures needed to maintain the pensions attack of the previous Tory government. Of course, this attack baton can now be handed on as a gift to the Coalition government.
For example, it was estimated that the liability for funded occupational UK final salary schemes jumped in June by a further £10 billion, notwithstanding previous inflated figures about pension fund deficits.
Was this deficit hike due to a discovery in June 2010 that people are living even longer? Of course not! It was entirely down to the way gilt yields fell from 4.04 per cent to 3.33 per cent between March and June this year.
The reality is that the funding of the population’s pension benefits is a 60-year+ rolling project for each person, and this timescale should mitigate the fact that in 2010 it so happens that gilt yields are temporarily at an all time low. When British gilt yields rise again (and there is absolutely no doubt that they will) what in the meantime will be left of our pensions?
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| Future pensioners hold up placards outside a union rally in London, 2006 |
The experience of workers retiring on money purchase pension arrangements (often called defined contribution or personal pensions) has been awful. This is because, unlike with final salary funds or the state old age pension, workers retiring on money purchase arrangements take the full market hit (only 2 per cent of the population will benefit from the proposed change to buying pension annuities). But it is this sort of pension that is being hailed as the future.
The trade unionists who are currently involved in helping bring about the Government National Employment Savings Trust (Nest) due in 2012 (i.e. state-sponsored money purchase personal pensions) would be better deployed getting a large increase to the basic state old age pension. This would be far cheaper, more effective and would prevent the introduction of a Trojan horse desig-ned to further destroy our state pension and occupational pension provision.
In essence the way pensions are costed needs to be examined. Instead of using government gilts and equities on the stock market, we should be investing our already-accumulated pensions capital in other ways to generate the necessary annual cash flow needed to pay our pensions each year.
For example, a British infrastructure fund organised by the working class – and using a part of our £800 billion savings capital that is already held in pension funds – would go a long way towards breaking out from the prevailing lack of endeavour. In doing so we would be free from the government’s long-held intent to waste our pensions capital by requiring us to buy its gilts and fund its indebtedness.
This is no isolated view – for example PIMCO, the world’s largest trader in fixed-interest securities, recently described British gilts as a bed of nitro glycerine.
Creative accounting
Finally, the “we are all living longer” brigades need to be made aware that the pensions deficit figures employ forward projections of past statistical trends. This form of double counting then allows the life expectancy improvements of the last 30 years to be more than doubled up again and then put into today’s current projections. This statistical inflating of figures is known as overestimating longevity risk based on statistical extrapolation of recent variation. Or to put this another way, we are being robbed.
There is similar intent behind the so-called final salary “early leaver problem” that was the subject of so much government mock concern during the 1980s. At the time it was claimed that because people were mobile in their jobs and only staying for a much shorter period with the same employer, a final salary pension linked to each year of service with that employer was no longer appropriate.
The figures were cooked to make out that workers at the time were staying in the same job for about 2.5 years, rather than the 5.9 years average for the previous decade. (Redundancy figures were excluded but helpfully gave a perception of mobility.) After the damage was done and portable personal pensions were introduced in 1987, it was found that as opposed to 5.9 years, the time spent with the same employer had barely fallen and was in fact an average of 5.4 years.
Of course, with the introduction of personal pensions in 1987 came the change in legislation whereby workers starting at a new company were no longer obliged to automatically join the company’s final salary pension scheme. This made it tempting for workers not to pay the pension contribution that went with final salary membership but instead keep the money as part of their discretionary spend.
It is this backdrop that partly explains why over 65 per cent of workers no longer have final salary occupational pension provision. The same type of sucker punch is being tried today, but using longevity figures rather than cooked-up early leaver figures as the excuse. Wake up!
• As Workers goes to press, strike days have been set for action at the BBC over planned changes to the pension scheme that could axe huge sums from the value of pensions. Majorities of over 90 per cent for strikes – the journalists recorded 93.6 per cent in favour – have set the scene for a bitter battle. The first strikes will hit the Conservative Party conference and the Comprehensive Spending Review statement, among other events.