The coalition's move to abolish the default retirement age of 65 is a step in the right direction, but simply allowing people to work longer will not solve the pensions crisis, either for individuals or for companies. Neither will the piecemeal measures announced so far, including the downgrading of inflation-proofing of benefits in line with consumer price inflation, which tends to run at a lower rate than the previous benchmark, retail price inflation.
The UK's 200 largest companies have a combined pensions shortfall of £100bn, according to Aon Consulting. In the short term, the economic downturn is likely to make the deficits even worse, due to technical factors related to the market in government debt. Companies are pinning their hopes on long-term recovery to reduce the red ink, but the deficits in themselves may be impeding economic revival. A study by the CBI and actuary Watson Wyatt found that a third of employers believe the need for additional pension provision had "significantly obstructed" mergers and acquisitions, or led to reduced competitiveness. Almost 40% claimed the pension fund had drained away money that would otherwise have been used for business investment.
Allowing employees to carry on into their late sixties and beyond is a sensible move. Those who want to continue should not be subjected to age discrimination, and older workers should increase productivity in the economy as a whole. If mature employees carry on working, they contribute to the economy and to the exchequer. Any blocking of opportunities for younger colleagues may be offset by the fact they are reducing the burden of elder support.
None of this, though, is a magic bullet for businesses grappling with final salary pension schemes. There is already a trend for companies to close them to new entrants and to scale down benefits, but that does not deal with their existing obligations, which in some cases amount to more than the market value of the company itself. Allowing people to work for longer doesn't cut costs: the length of time they draw a pension will be shorter, but it will be at a higher level.
In the past few weeks, there have been a number of rows about pensions. BT is battling regulator Ofcom, which has banned it from raising the prices it charges rivals to help plug its £6.6bn deficit. Workers at an AstraZeneca drug factory are holding a strike ballot over plans by the company to freeze pensionable pay for its final salary scheme in a bid to tackle its deficit of £1.4bn. Uniq, which makes sandwiches and salads for M&S, had a plan to pay off its £436m deficit rejected by the pension regulator.
There will be more of these conflicts as companies seek to bring their pension liabilities under control, not only with employees and regulators, but also with shareholders. Despite the overall weakness of the UK economy, some large companies are seeing profits flow again. Dividends are being raised at British American Tabacco, BAE, Centrica, BskyB and Rolls-Royce, and AstraZeneca has increased its share buyback programme.
Questions will be asked about why investors are benefiting from the cash generation ahead of fund members, though this is complex. The largest shareholders in the UK are in fact pension funds, so depriving them of dividend income seems self-defeating.
Companies have some difficult judgments to make: on extra pension contributions versus dividends, and on ploughing money into the fund versus investing in the business. Some will behave cynically, and some funds will be impossible to save. The Pensions Regulator reports an increase in potential avoidance activity, and 160 schemes have gone into the lifeboat scheme provided by the Pension Protection Fund.
Most people, understandably, prefer not to think too hard about their retirement finances. The credit crunch has put us in fear for our jobs and the value of our homes – pensions are just one more worry. There is only one message, and it is not an easy one for politicians to deliver: work longer, save more and spend less, supposing you are fortunate enough to be able to do so.
Article from The Guardian