The final salary pension scheme: a relic from an earlier era
Many people blame low gilt yields for the demise of final salary pension schemes. But the truth is that they are a hangover from a time when we took no responsibility for our own retirement.
I recorded some comments for Newsnight yesterday on the general disaster that is UK pension provision.
New stats show that only around 13% of final salary pension schemes are now accepting new entrants (that's down from 43% only in 2005). Some schemes have even shut to existing workers that of Rentokil in 2005 being the most well-known example.
It is easy to see why this is happening. The removal of the dividend tax credit (whereby pension funds could claim back a 10% nominal withholding tax) in 1997 and the end of the great bull market of 1980 to 2000 had a fast and unpleasant impact on the value of pension funds and on their income expectations.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
This has been aggressively compounded by the UK government's rock bottom interest rate policy which has base rates at their lowest since the late 1600s and gilt yields (the rate funds must use to calculate their liabilities) correspondingly low.
But on top of all this there is one other thing: longevity. The fact that we are all living longer is a wonderful thing in most ways, but if you are a pension fund trustee, it is a total nightmare.
Why? Because you're paying out money to a whole load of people who retired in the early 80s who you thought would be long dead by now. Instead, they're popping in between rounds of golf to pick up two thirds of their previous salary every month. Inflation adjusted.
It also means that a good many companies are finding that their businesses are at the mercy of the pensions regulator a CEO told me a few weeks ago that his final salary pension deficit is such that he can make no new investments in the company without thinking of any impact on the pension first. The tail wags the dog.
I'm sorry about the end of the final salary pension (largely because I haven't got one, and it is too late for me to start a new career as a middle-ranking civil servant). But the truth is that while gilt yields might have sped their demise up a little, they have long been on their way out.
In the private sector at least, final salary pension schemes belong to a paternalistic past a time when you worked at the same company for your entire working life, and one in which the company had obligations and loyalties to you as you had to them.
We don't have that any more. Instead, we shift jobs frequently; we freelance; we take on short term contracts; and we run web businesses on the side. So it makes no sense for us to have bits of pension stuck with institutions to which we have no long-term connection. Admin hell.
What's more, it is impossible to make a case for those institutions to take on the long-term risks of our pensions when we aren't working for them over the long term. What if I had a final salary pension at MoneyWeek and then left to work at, say, The Economist? Why should MoneyWeek take on the long-term risk of managing me as a liability while I enrich (as of course I would...) a competitor? Nuts, really.
So, while I wish we could all still delegate the financial risk of our futures to our employers, I think we have to accept that it just isn't possible any more. In an era in which we end up taking more responsibility for our careers, we also, I think, have to take responsibility for our pension arrangements.
PS One point I tried to make on Newsnight was that all this pension disaster stuff is put out by the pensions industry, and it is worth remembering that we aren't all undersaving. Instead, some of us might actually be oversaving more on this here.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Best funds to add to your ISA or SIPP before the Budget
With Labour expected to increase taxes, ISAs and SIPPs could be a great way to protect yourself from CGT hikes. We look at the best funds to buy now
By Katie Williams Published
-
Starling Bank slapped with £29 million fine over ‘shockingly lax’ financial crime controls
The Financial Conduct Authority has fined Starling Bank £29 million over failings related to financial crime and its financial sanctions screenings
By Kalpana Fitzpatrick Published
-
Our pension system, little-changed since Roman times, needs updating
Opinion The Romans introduced pensions, and we still have a similar system now. But there is one vital difference between Roman times and now that means the system needs updating, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
We’re doing well on pensions – but we still need to do better
Opinion Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
Older people may own their own home, but the young have better pensions
Opinion UK house prices mean owning a home remains a pipe dream for many young people, but they should have a comfortable retirement, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
How to avoid a miserable retirement
Opinion The trouble with the UK’s private pension system, says Merryn Somerset Webb, is that it leaves most of us at the mercy of the markets. And the outlook for the markets is miserable.
By Merryn Somerset Webb Published
-
Young investors could bet on NFTs over traditional investments
Opinion The first batch of child trust funds and Junior Isas are maturing. But young investors could be tempted to bet their proceeds on digital baubles such as NFTs rather than rolling their money over into traditional investments
By Merryn Somerset Webb Published
-
Negative interest rates and the end of free bank accounts
Opinion Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK banking system slightly less awful, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
Pandemics, politicians and gold-plated pensions
Advice As more and more people lose their jobs to the pandemic and the lockdowns imposed to deal with it, there’s one bunch of people who won’t have to worry about their future: politicians, with their generous defined-benefits pensions.
By Merryn Somerset Webb Published
-
How the stamp duty holiday is pushing up house prices
Opinion Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb.
By Merryn Somerset Webb Published