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Thursday, August 06, 2009

Death of the final salary pension scheme

Understandably, the young think pensions are a complex and boring subject. Not so when your age begins with a 5 or a 6.

One of the top four, maybe the most important, factor affecting the ability of older people to keep spending is the size of the private pension. The state pension, in the UK just about buys the absolute essentials of life; the private pension enables people to live.

The pension that pays the most and has the least risk for the individual is the final salary pension. No worry with this type of pension about the chaos in the stock market, the payments just keep coming, irrespective of what is happening in the world.

There are now only three companies left in the FTSE 100 that provide this type of scheme for new employees - Cadbury, Diageo and Tesco. You don’t need to be a genius to calculate the 97% don’t.

If you add up the total deficit of all of UK FTSE 100 pension schemes you come to an astonishing figure of £96 billion - more than double the amount time last year. The deficit in all of the company schemes is now above £200billion with 88% of the country's 7,400 defined-benefit pension schemes facing a shortfall.

It is not surprising that PricewaterhouseCoopers found that only a quarter of employers offering final-salary pensions intend to keep the schemes open to existing members

A decade ago it was the general view that the UK had one of the best occupational pensions schemes in Europe. We Brits carped on about the fact that we had more money saved in pension schemes than all the rest of Europe put together. What a difference a decade makes.

What went wrong? Back in 1997 the UK’s Chancellor of the Exchequer was a certain Gordon Brown who stopped companies getting tax relief on their pension fund’s investment income. This meant that it became increasingly costly to provide high grade pensions. Result. Companies started closing the schemes. Compound this decision with the decline in the value of the stock market, which is showing a negative real return over the last decade, and you can see why corporate pensions are in such an unholy mess.

If things weren’t bad enough, Gordo, now the Prime Minister, changed the tax treatment of pension plans again, by reducing tax relief for top-rate taxpayers.

Why am I telling you this, other than a tad of personal annoyance? Each age cohort reaching retirement will be materially less well-off than the previous one. Worse than that, to provide even a basic level of pensions, consumers will be forced, via taxation, to increase their contributions. Remember, money paid to pension funds doesn’t buy flat screen TVs.

I nearly forgot. None of this applies to Government workers, who continue to receive the Rolls Royce of pension schemes, paid for by the poor saps in companies.
Dick Stroud

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