The final salary pension scheme: a relic from an earlier era

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.

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.