Pension Wind Ups - a list of broken promises?

peterbaker

(withdrawn)

Pal

I didn't hear the interview.

I am not sure I understand the point of compiling such a list. Can you please explain?

Personally I do not believe that the closure of private final salary schemes means that the closure of public service final salary schemes is inevitable.

I do however think that public service schemes are inevitably likely to either be closed to new employees or be redesigned to be cheaper to provide (e.g. higher retirement ages, less generous ill health provisions etc). This is because people are living longer, expected investment returns have fallen and joe public is not willing to pay singificantly increased levels of tax (esp. council tax) to provide above average pension benefits to local government employees, especially when their own private pension arrangements are not as generous.

In the end public services are not immune from the same economic issues that impact on the private sector and have led many companies to change the design of their employee's pension provision.

It is unfortunate, but this is the price that is paid for our current low inflation, low interest rate (low investment return) economy. Give it 10 years and final salary schemes will start to come back into fashion.

dunstonh

Blame the Govt for the £5 billion a year it takes from pension funds. One of the first hidden taxes that labour introduced when they got into power.

dunstonh

Labour decided that these funds were largely overfunded and the removal of the tax credit was a good way of raising money.

In reality, the pensions were overfunded because of the rather quick growth that had occured on the stockmarket and we all know what happened next.

Indeed, Labour are also to blame for much of the underperformance of the UK stockmarket, the failing of endowment polices and many of the insurance companies.

In spring 2003 equity yields exceeded those on 10 year gilts for the first time in 50 years. Had the yield "safety net" been say 25% higher (which it would have been if tax credits had not been removed) this point would never have been reached at around 4100 on the FTSE100 Share Index and not 3287 to which it fell.

If the FTSE had not fallen this far, many of the liquidity issues triggered by the life insurers and pension funds in the UK would have been avoided. These issues caused them to sell equities and buy bonds, in turn, aggravating the fall.

Equity yilds exceeding those on gilts was one of the triggers for the market revival. And without the removal of tax credits this point would have been reached at 4100 and not 3287. And had hte markets not experienced such a severe fall, they could reasonably expect to be on at least the same gross yield as todays net yield. placing the FTSE at around 5750.

The UK economy has performed better than any other G7 economy. Yet the UK stockmarket has performed significantly worse than any other western market.

So the Govt can easily be blamed for the pension, endowments and savings problems that many now experience.

(external research used in this post to support the point).

dunstonh

Fine.   Ignore the facts and go round pointing the blame at everyone without actually knowing the reasons why this happened.

Pal

Now, now children. Be nice!

It is interesting how many people attempt to blame the financial services industry when company pensions are closed or wound up. I am an adviser to a number of companies and have helped some of them close or wind up their defined benefit pension schemes, however all I ever do is present them with the possible options available to them along with a list of consequences and implications. It is up to the company to make the final decision.

Unfortunately when the facts are laid out in front of people making decisions, most choose to close down defined benefit schemes, at least for new employees or for future service for everyone. This is unfortunate but in the low investment/low inflation world that is the best possible route for most companies to follow. Sometimes the decision comes down to a choice between changing the pension arrangements, losing staff or (in more than one case) bankrupting the whole business.

Even those employers who still have defined benefit schemes will usually admit that they would not have one if they could start again. The financial risks are too great.

In practice I spend most of my time attempting to protect member's benefits and boost the benefits paid by the replacement schemes.

I agree with Peter that the withdrawal of support for schemes by solvent employers (resulting in lost benefits for many employees) is deeply unfair. Unfortunately the economic environment (as explained by DD) has led to this unfortunate position. In the end pensions are an investment, and they can go down in value as well as up, and the final benefits are never guaranteed. The fact that this was never explained to members is something that the industry only realised a few years ago when the stock market problems really started. Hindsight is a wonderful thing.

I also have no doubt at all that the removal of tax credits by Gordon Brown has resulted in many more final salary schemes being closed than would otherwise have been the case.

Of course, if GB had simply left tax at 23% instead (or raised it to 24%), would the whole economy have suffered instead? Would a larger number of people now be unemployed (as in Germany)? Which do we prefer, lost pension savings for a few or jobs for the many? I have no idea, but as with all these things there are advantages and disadvantages to each method, but I can understand how gauling it must be to be one of the people who lose out.

Pal

This is at the heart of the problem.  Why have you done this?  I am sorry Pal but I conclude that it is because you continue to make a living from such advice, an not because you have signed some kind of hippocratic oath.

I think the heart of this particular problem is your lack of understanding about what advisers are there to do, and your obvious desire to lash out at what you perceive to be a reasonable target.

What I do is, when a company comes to me concerned that their pension scheme is becoming a financial or administrative problem, is help them find a suitable solution.

I present lots of possible solutions to them and guide them to a decision that best meets their objectives, taking into account the possible conflicting interests of the shareholders and employees at the same time. At all times the interests of the employees is one of the main drivers behind both the advice and is almost always one of the main concerns of the company.

In almost all cases, the final solution involves leaving a final salary scheme open but dealing with some other problem e.g. communication issues, investment managers, asset allocation strategy, hedging vehicles and so on.

But on occasion, it is in the interests of the company and its shareholders to replace the final salary scheme with something else. Very rarely this results in employees or ex-employees losing out. In most cases the management of companies have struggled for years to try and avoid making these decisions, as much as anything because they are also members of the scheme.

No, I do not have to sign an oath, but if I deliberately went around attempting to get companies to wind up pension schemes, despite the fact that it would cause administration and major public relations problems for my clients, the press would soon be after me and I would very quickly cease to have any clients. I make my living from helping companies run their final salary schemes! I do not want them all to wind up!

I think that you need to remember that incidences of companies that are solvent and profitable choosing to wind up their final salary pension schemes, with the result that members losing their benefits, are very, very rare. The vast majority of the 60,000 or so people who have lost out from the closure of final salary schemes did so because their company went bust, and it is unfortunate that there was no safeguard in place to protect them, but that is the nature of investments. It is more unfortunate that none of the members were warned that this was a possibility, as I mentioned previously.

If you were an employee of a VERY rare !!!!!! employer who wound up their final salary scheme without fully funding it simply to increase their already healthy profit margins then I sympathise a great deal. However I am not sure that tarring all companies or their advisers with the same brush is entirely reasonable.

deemy2004

Companies made the mistake of promising what they cannot deliver.

The £5 billion taken from the pension funds is insane ! especially when they are trying to get us to put more into the pension funds !

Probably one of the reasosn for the relative under performance of the UK stock market is because of the lack of that £5 billion a year going into equities. £35 - £40 billion to date.

DavidLaGuardia

To b e fair governemnts of all colours have done their bit for damaging pension funds. If holidays had not been taken by companies when things were going well, pension funds may not be facing shortfalls. But they did so with prodding from a Conservative Government a Labour Government then compounded the ill effects
I don't think "broken promise" argument is always fair. Companies should not be held to a blank cheque epecially as conditions have changed dramatically not least investment returns and the amount of time we no live for.
I especially think public sector pensions should cost slightly more as private sector pensions have had to. Especially the cicil service who pay from zero to three percent for the same pension teachers and local government pay 6% for. Not to mention the amount of gravy train positions and bleeding liberal sick pay policies that the rest of us for.

dunstonh

The impact of the £5 billion a year "withdrawal" by the Govt is estimated to have a reduction of £300billion on the stockmarket.     You cannot dismiss the impact it has had.  

The majority of schemes are winding up or not accepting new entrants.   The money isnt lost.  Its just no longer affordable for companies to accept the open ended liability of the final salary pension scheme.    It is unfortunate that some have lost money but in the scheme of things they are only a small minority.

Life expectancy for men aged 65 has increased from 12 years in 1950 to 19 years today. Not only that, but it is projected by the Government Actuary to increase to nearly 22 years by 2050. That sounds bad enough, but if they've got it wrong again (something they have a bit of a track record for) then current trends could indicate it rising to nearly 28 years by 2050. So, by the middle of the century, men will be looking to make it to 93, no bother.

The current fertility rate in England and Wales works out at around 1.7 children per woman and isn't predicted to increase much if at all in the foreseeable future. That's a bit awkward as we require a fertility rate of around 2.07 children for every woman if we want to maintain the population at a steady level. An extra 0.37 of a child per woman isn't the easiest thing to imagine, I know, but as it doesn't seem likely to happen anyway I suppose we'll just have to accept there'll be fewer people around in the future to provide our pensions for us

Would you want your business to have the open ended liability of a final salary scheme when looking at that situation?

And the "IFA" survived throughout the whole period. I assume they negotiated their own deals as often occurs.

And how many IFAs are involved in dealing with final salary occupation pension schemes?

As I said, Pal, I have never been able to bring myself to like a financial advisor, and it is mostly because of the total lack of commitment displayed the moment the advisor catches a whiff of difficulty.

That is just plain stupid.   You are saying that if someone who you have known and liked for years decided to become a financial advisor, you would stop liking them.  

I especially think public sector pensions should cost slightly more as private sector pensions have had to.  Especially the cicil service who pay from zero to three percent for the same pension teachers and local government pay 6% for.  Not to mention the amount of gravy train positions and bleeding liberal sick pay policies that the rest of us for.

Public expenditure on State pensions and benefits in 2002 was 6.1% of GDP. But the State was also in for another 1.5% of GDP in that year to meet the unfunded pension liabilities of the public sector schemes. Or to put that another way, the generous unfunded pensions to a handful of public servants costs us about a quarter of what we pay out to all our pensioners each year through the Basic State Pension, SERPS, S2P, the Minimum Income Guarantee and all the other means-tested handouts. To me that means we're either paying out too much to our public servants or not enough to pensioners in general.

Pal

The 5 billion is a red herring.  Its a big number outside the understanding of most people but 500 billion is 100 times bigger.

£5billiion is an annual figure. Is the amount not going into pensions EVERY YEAR that would have been had the rules not been changed.

What's 500 billion got to do with all this?

That's broadly the total size of the public sector final salary pension schemes shortfall currently.

I am not sure why you have mentioned this. Are you suggesting that taxes should be increased to pay off this deficit? Or that these pension funds should also be closed down to future accrual as they are obviously unaffordable in the current environment?

The fact that such a large shortfall can arise in publicly funded schemes just goes to demonstrate the major financial problems that final salary schemes can cause for private employers, and the main reason these schemes are being replaced with cheaper or less risky alternatives.

Pal you forget that I was once an FCII by examination.  

No, I didn't forget. Although I have not reviewed the FCII syllabus lately I am unconvinced that an largely insurance based qualification gives a great deal of perspective on the current issues facing private pension provision in the UK. No doubt you will correct me if I am wrong.

I worked for the biggest and best company in the land when I was studying for that.  That company is now a burnt out wreck of a company.   It's share price is 10% of what it was just 4 years ago.    Who wrecked it/stole the company silver?  I certainly didn't - when I left it in 1988 it was contemplating its navel in a big way, and it could have sorted itself out after that but didn't.  

So you worked for a badly managed company. What relevance is that?

It is however a good indicator of how sick the financial services industry became.

Is it? More likely it is an indicator of how that particular company was run.

You score no points as a financial advisor for turning up and offering a choice of fire extinguisher to those employers who found it was getting a little hot in the kitchen and simply wanted a cool way out!

No, but I do earn a decent living from it. Are you suggesting that all final salary schemes would be completely fine if it was not for financial advisers? What a load of rubbish! Most of my time is spent helping companies run their pension schemes properly for the long term benefit of their employees, which is what they are designed for. Sometimes it involves changing the ways benefits are provided, and very occasionally it involves making detrimental changes to pension scheme benefits, however this is almost always in order to help protect employee's jobs by protecting the employer they work for. In the end the company has to make these final decisions, but enabling them to do so on the basis of educated balanced advice is a service that companies are happy to pay for.

I think you said earlier that final salary schemes would quite likely be back in vogue in 10 years.  If that is true then why have you and others not been working constantly to ensure robustness in the schemes you have advised upon so these 10 year troughs and crests were properly ironed out?

I have and am doing this. The problem is that in unexpected circumstances it sometimes goes wrong. Financial advisers are not mind readers. Predicting a three year stock market crash and a massive tax raid by a new Government is unfortunately outside of my abilities. Hindsight is a wonderful thing, and it is very easy to pass blame with the benefit of it.

No-one cares if final salary schemes are back in vogue in 10 years.  I shall be 57 then and none of my previous employers is going to come to me in 10 years and say "we've unwound your scheme wind up and are pleased to confirm we can re-make the promise of a final salary pension that we made you when you joined us in 1970 whatever or 1980 whatever or 1990 whatever."

You are correct, and that is a shame, and is one of the reasons why the pension industry has been helping the Government introduce additional financial protections for pension schemes, many of which are being introduced from next year.

How do you know this?  How dare you suggest that only 60,000 total have lost out from the closure of their final salary schemes.

Off the top of my head I can't remember exactly where this came from, but it is, according to the Government, the approximate number of people who have lost out over the last X years (not sure of the number) from Final Salary scheme closure, and it is these people that the new Financial Assistance Scheme is designed to help.

I worked for an American company in 1992 that closed its scheme and sent a 4M dollar extraordinary profit back to the parent company as a result of "rationalisation of our UK operations employee benefits package".  The UK operation was about 200 people.  Exactly the same thing occurred in late 1999 when another American company took over my then employer, except they didn't manage to steal a surplus back to the US before they themselves got taken over by a British company.  However that British company continued with the plans to wind up the scheme to the detriment of the workers they left behind.  The trustees (all officers and directors of course!) were fine of course.  And the "IFA" survived throughout the whole period.  I assume they negotiated their own deals as often occurs.

Without knowing exact details it is impossible to comment but you seem to be saying that you worked for a few unscupulous companies who shafted their employees. You have my sympathy, but tarring every company and every adviser with the same brush is unjustified, as my experience is that these employers are very rare. I have never personally come across one. Perhaps it is simply that employers like that do not ask me for advice.