[A-List] UK pensions crisis

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Retiring in 20 years? You'll be poorer than your parents

The great middle class pensions panic has begun, and it's unlikely to go
away quietly

Patrick Collinson
Wednesday June 26, 2002
The Guardian

Colin O'Callaghan knows he is one of the lucky ones. He joined BT before
it shut its traditional pension scheme 14 months ago and is in line for
a generous retirement income. Many others - including all new workers
joining the telecommunications group - may be lucky to pick up a pension
worth 25% of their final salary.

Pensions in Britain are in crisis. While today's pensioners hardly live
in clover, the prospects for today's thirty and fortysomethings is much
bleaker. The main cause of this dire outlook is the decision by UK
business to jettison decades of paternalistic pension provision, which
sought to guarantee a decent standard of living to loyal employees, in
favour of an approach which puts the onus on individuals.

BT, the former telephone monopoly, provides a good example of this. A
union rep at the group, Mr O'Callaghan revealed to the annual conference
of the Communications Workers Union yesterday how the axing of schemes
is hitting new employees. His figures make grim reading, not just for
new BT employees but for a generation of workers being denied the chance
of joining final salary schemes.

Around 3,000 workers have joined BT over the past 14 months. Instead of
the promise of a guaranteed income in retirement, they have been asked
to make contributions to the money purchase scheme, which will then be
matched by BT and invested in the stock market. The minimum contribution
from an employee is 4% of salary, the maximum 10%. Given such a choice
new employees, often carrying the financial burden of a mortgage and
bringing up a family, are opting to pay the minimum. Mr O'Callaghan says
the average contributions from the new joiners has been just 4.7% of
salary, matched in turn by 4.7% from BT.

These percentages will mean little to employees not retiring for another
20 or 30 years. But pension experts say the minimum total contribution
needed to equal the benefits enjoyed under a final salary scheme is 18%
to 20% of salary, every year. New entrants to the BT scheme are
contributing a total of 9.4%, less than half the amount needed. This
contribution represents a huge cost saving to BT, and is likely to be
matched at other big companies which have dumped their final salary
schemes over the past year, including Sainsbury's, Marks & Spencer's,
Barclays and Abbey National.

Wake-up call

During the last few years of the final salary scheme, BT was paying in
contributions averaging 11.6% of each worker's salary. In just one year
this contribution has fallen by nearly two thirds to 4.7%. Because
pensions are, in effect, just another part of workers' pay, BT has put
through a 7% pay cut for new workers, who have barely noticed. Until
now. "We used to have one resolution about pensions passed at the union
conference every couple of years, and more often than not it was put
forward by the executive. This year we have 10 resolutions, all put
forward by members. Complacency has gone, people are now very, very
worried," Mr O'Callaghan said.

Most fearful are the BT staff still in the final salary scheme. Their
concern is that BT secretly wants to close its final salary scheme and
eject all of them into a money purchase scheme, but this time they won't
accept change so meekly. The CWU conference this week voted to take
industrial action if BT does this. Mr O'Callaghan will also lead a fight
to make BT increase the level of contributions it makes to the pension
scheme, asking the company to put in 2% contributions for every 1% of
salary paid in by employees.

BT spokesman Mike Bartlett said: "Perhaps employees should be finding
ways to put more money into the scheme. If they put in 10%, BT will
match it. Perhaps we need more education about the amounts that people
need to pay in."

Some 10m workers - 46% of all employees - are members of an occupational
pension scheme. The TUC says the average employer contribution into a
final salary scheme is 15.4%, but for a money purchase scheme it is just
6%. A recent survey by finance and banking union Amicus found that 80%
of members are prepared to strike to defend pensions.

But the fight to restore quality company pension schemes will be tough.
The root of the problem is the fall in the stock market by a third since
its high in early 2000. But even if it recovers strongly - and few
pundits are predicting that - there is little likelihood the problem
will melt away. Improvements in longevity mean that companies are
finding the burden of paying pensions stretching over 20 or 30 years of
retirement hugely expensive.

BT, like other big British companies, has long enjoyed a reputation as a
paternalistic employer. When introducing the money purchase scheme, it
claimed it would yield benefits to employees such as greater
flexibility. Critics add that it had little choice when faced with a
burgeoning shortfall in the fund when its core business was laden with
£30bn of debt.

Last year it identified a £3bn hole in its £25bn final salary
pension fund. Such funds have been the biggest losers of the stock
market declines of the past two years. Other big companies are also
discovering similar sized gaps which escalate with every fresh fall in
the stock market.

Corporate accounts put the size of the deficit at Rolls Royce at
£392m, ICI £453m, Astra Zeneca £463m, BAE Systems £776m and HSBC
£620m. More recent estimates, taking into account the recent fall in
the FTSE, suggest that Marks & Spencer's deficit may have ballooned to
£600m, with Rolls Royce at £850m.

The impact of the shortfalls has been made worse by the implementation
of a new accounting standard, FRS17, which obliges firms to make an
annual review of their scheme's assets and liabilities and declare the
results in their annual report and accounts. Pensions consultant William
Mercer said that the accounting standard will show that half of the UK's
top 500 companies will have pension liabilities that exceed their
assets.

The inclusion of this shortfall in reports and accounts has spooked the
stock market, compounding the problem of falling equities. Faced with
this ever-decreasing circle, company managements are under ever greater
pressure to close expensive final salary schemes. A survey of 3,000
companies by the Association of Consulting Actuaries this month found
that half of all the remaining final salary-based company pension
schemes are expected to close to new staff in the next few years.

The association said the speed of collapse of the schemes was startling.
"These statistics suggest that within a few short years we are likely to
see the numbers covered falling away rapidly," said ACA chairman Gordon
Pollock. The survey found that 47% of companies are contemplating
shutting final salary schemes.

But adding to the anger is the fact that while managements are telling
workers that the company can no longer afford the final salary scheme,
the same directors are keeping their own "executive" final salary
schemes, and in some cases even improving them. Research by The Guardian
last year found that while only 44% of FTSE 100 companies had final
salary schemes open to all staff, 76% had schemes in place for
directors.

Directors' cuts

Only yesterday, Yell, BT's former Yellow Pages directories business,
said that new staff will have to take their chances with a money
purchase scheme. Existing employees stay in the final salary scheme.

Chief financial officer John Davis, meanwhile, will be entitled to a
full pension of two-thirds final salary after 30 years' service, instead
of the usual 40. Chief executive John Condron was given a boost to his
pension, adding two and a half year's service which will award him a
pension of £146,000 a year plus a lump sum of £439,000.

Fat cat pensions are now under the political spotlight and MP Jim
Cousins, a treasury select committee member, said yesterday: "I hope the
government will look at the issue of different employees accumulating
the pension at different accrual rates."

While there is anger about such dis crepancies, today's ICM poll for the
Guardian shows victims of the pension crisis do not know who to blame
for the feared shortfall - their company, the stock market or
themselves.

The Conservatives are moving swiftly into gear to exploit the anger.
Tomorrow they will hold a "crisis summit" to highlight the government's
failures on pensions. Shadow work and pensions minister David Willetts
is expected to point the finger of blame at one of Labour's earliest
"stealth tax" rises, the removal of advance corporation tax credits from
pension schemes in 1997, which raised £5bn in tax but was disguised
for several years by benign stock markets.

The TUC is calling on the government to force employers to contribute to
people's company pensions at a rate of £2 for every £1 paid in by an
employee. For the average employee paying in 6%, this will take their
total pension pot to 18% of salary a year, going a long way to plug the
funding gap. But the CBI responded that the TUC's proposals will
accelerate the closure of company schemes. It says a better solution
would be to simplify pension regulations, improve the tax treatment and
review FRS17.

Then there is the thorny issue of longevity. In 1909, the state pension
age was 70. In 1925, it was reduced to 65 for men and has remained there
since. Now there are calls to raise it to 67 - as suggested by the
Institute for Public Policy Research - and 70 - the National Association
of Pension Funds. Once the state pension age is raised, it is expected
that the date for retirement benefits in company schemes will also rise.

When Andrew Smith became the new work and pensions secretary in the
post- Stephen Byers cabinet reshuffle, media attention focused on how
incoming transport secretary Alistair Darling would grapple with
Britain's crumbling rail and road infrastructure.

But it is Mr Smith who now finds himself at the centre of a growing
political storm. His first speech indicated a coolness towards
compulsory company contributions, flagging up instead the government's
preference for extending retirement ages. In spite of this coolness,
there is believed to be more support for compulsion at the Treasury.

Either way, little is expected to emerge officially until the
publication in July of a report by Alan Pickering, the former head of
the NAPF, originally commissioned by Alistair Darling.

Meanwhile, employees now receiving dismal pension projections from their
companies face tough times. Most can pay in more to their schemes,
although in falling stock markets there is little appetite for throwing
more money into shares.

Economic growth is supposed to deliver higher living standards all
round, but what today's generation of 30 and 40-year-olds may find is
that they are the first to suffer lower incomes in retirement than their
parents. The great middle class pensions panic has begun, and it's not
going to go away quietly.