[A-List] UK legitimation crisis: pensions

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

A company pension more lethal than the bear
John Plender on Monday
Financial Times, October 21 2002

Yet another mis-sold pup

Conventional wisdom has it that defined contribution occupational pensions,
in which employees shoulder all the investment risk, are a bad thing.
Defined benefit schemes, which promise to pay a pension related usually to
final salary, are widely thought to be safer. Yet events in the pensions
business suggest to me that perceptions are about to change in a big way.

Consider what has happened at the Sea-Land subsidiary of international
shipping group Maersk. Maersk has decided it is no longer prepared to fund
the £10m pension fund. The fund is deep in deficit and would require a
substantial increase in company contributions to meet current pension
liabilities in full. It nonetheless meets the UK's minimum funding
requirement. The result is that some employees will lose up to 60 per cent
of their pension entitlement.

Since Maersk is owned by the big Danish shipping group A P Moller, which
remains very much in business, this looks particularly cynical, even though
the company is meeting the winding-up costs. But there will be many more
cases where funds will fail to meet pension obligations because of the
bankruptcy of the employer. TXU Europe, for example, may be the first of
many in the power generation business to go into administration.

In this bear market, with deficits popping up all over, people will become
more aware of the inadequacy of the minimum funding requirement, which fails
to provide a solvency guarantee, and of the arbitrary way in which the fund
is allocated. Pensioners come out best, younger workers come out badly and
workers close to retirement suffer the galling experience of seeing pension
rights vanish that would have remained intact if they had retired months
earlier.

Share prices have not fallen by 60 per cent, even in this particularly steep
bear market, which highlights the insecurity of pension rights in defined
benefit schemes. Sue Ward, an independent pensions expert who sat on the
Goode committee on pension law reform, detects another case of pensions
mis-selling. She recently told the House of Commons select committee on work
and pensions that scheme members have much less security than they were led
to believe.

The whole point of a pension fund is to ensure that the pension is safe even
if the company goes down. But recently, says Mrs Ward, the pensions industry
has redefined its sales pitch to say that the pension promise is only as
good as the company's solvency. If so, she adds, it is hard to see how any
individual can ever properly be advised to join a final salary scheme in the
private sector. A salvo worth thinking about.