Unity

From Unity, 16 January 2010

The pressure on pensions

by Gary Dennis

Pensions have taken a battering in recent years, and the recession appears to have struck the final blow to many defined-benefit schemes.
     Will employer pension schemes survive in their current forms, and how are unions defending this essential worker benefit?
     In 2005, as the Pensions Commission, led by Adair Turner, prepared to deliver its final report, there was a clear public agenda on pensions: we weren’t saving enough for retirement, the state pension system wasn’t fit for purpose, and a new pension settlement was urgently needed.
     Now, it seems, quality pensions are an expensive luxury that even the richest companies can’t afford.
     In a Price Waterhouse Coopers survey published in June, 96 per cent of companies saw defined-benefit (DB) pension schemes (such as final salary schemes) as “increasingly unsustainable”; 88 per cent felt that the public sector had an “unfair advantage” by being able to continue to offer quality defined-benefit schemes; and 77 per cent felt budget tax changes would “reduce companies’ motivation” to provide pensions (even though these changes only affect people earning £150,000 or more).
     Just 4 per cent of companies were planning to make no changes in their pension provision.
     Last month’s report by the audit and tax advisers KPMG reinforced the impression that defined-benefit schemes are “no longer feasible,” with 22 per cent of the top firms (FTSE 100) facing “no prospect of clearing pension deficits from discretionary cash flow over any reasonable time period.”
     Unions are sceptical. Commenting on the PWC report, the TUC accused companies of using the recession to attack long-term pensions benefits; but there is also concern about the role of pension “pundits.”
     Naomi Cooke, the GMB’s Pensions Officer, slammed KPMG as “a firm that wants to make money out of encouraging employers to close their pension schemes.”
     The continuing onslaught has put unions under pressure to negotiate new deals. The pensions agreement between the Communications Workers’ Union, Connect and BT (see Workplace Report, November 2008) concluded at the end of last year was one example.
     Unite is currently fighting to save defined-benefit schemes at Barclay’s Bank, Fujitsu, and IBM, while BP’s plan to close its final-salary scheme to new members had a “final straw” feeling to it. News that RBS plans to cap pensionable future pay rises and promotions for staff in its final-salary scheme was another body blow.
     Recently, even defined-contribution schemes, which generate a pot of money on retirement for individuals to invest in a pension “annuity,” have come under pressure. The insurance firm Aon is capping contributions at 6 per cent of salary (unless individuals pay more), while American Express has suspended contributions to its stakeholder pension scheme for eighteen months.
     One of the drivers of change is the prospect of employers being compelled to contribute to work-place pensions from 2012. This was one of the main recommendations of the Pensions Commission, set up in 2002 to investigate private pensions. It was backed by the warning that 9.6 million people were under-saving for retirement, and 46 per cent of those in work were not contributing to a private pension. This proposal is now being implemented.
     The minimum contribution level will be much lower than what good-quality occupational pension schemes currently provide, but pension scheme membership should at last start to expand.
     Workers will be automatically enrolled, either in an employer scheme meeting minimum standards or in the new Personal Accounts scheme (see below). They will, however, be free to opt out.
     Union experience with existing automatic enrolment arrangements shows that opt-out rates can be high. Alan Fox, National Pensions Officer at Unison, points out that in local government about 30 per cent of the work force make a conscious decision to opt out.
     Low earnings and part-time work play a big role in this, as does age (young people are traditionally less convinced of the need for pensions saving), but there could also be new factors, like student debt.
     From 2012 the minimum standard for an occupational pension scheme will be that set for the new Personal Accounts. An employer contribution of at least 3 per cent of earnings (on a band of earnings), an employee contribution of at least 4 per cent, and around 1 per cent in tax relief.
     There will be a contribution limit of £3,600 per year (based on 2005 earning levels) and a general ban on transfers in and out, to focus the scheme on employees who don’t have access to a good-quality work-based pension scheme.

Home page > Publications > Unity > The pressure on pensions

Baile > Foilseacháin > Unity > The pressure on pensions