Pension Wind Ups - a list of broken promises?

Pal

As I said, Pal, I thought trustbusting is a crime.

In an earlier thread, you and DD together advised a 44 year old enquirer who was desperate to get her hands on the cash in her pension fund that the answer to her question about whether she could do so was "No" and "No" again. What you didn't say was that Trustees apparently have substantial collective power to move the same dosh around to suit their employers whims. Some bright sparks have already set themselves up in slightly less formal arrangements that look pukka and managed to get the cash out - but then a number of them have been jailed.

Trustbusting is a crime, but what I was describing is not Trustbusting (a fantastic daily mail style soundbite).

I am describing the transfer of assets from one fund to another using a perfectly legal, highly regulated process that is designed to protect the value of the member's accrued benefits and secure them in another Trust that is at least as secure and often more so than the one being left behind.

This thread is not about solving the economic problems faced by employers who made promises they found uncomfortable, but about punishing those that felt they had the right to break the promises.  No one has that right in my book.

Well congratulations. I am sure that all those employers who come to this website will feel themselves to have been suitably punished. Well done.

Pal

Hindsight, hindsight,  hindsight......

If you made a promise that could not be kept what would you do?

That is the situation with public sector pensions.  Final salary retirement at 60 is just not affordable with a rapidly ageing population without causing massive civil unrest as tax rates for employed people rocket.

Should we have seen this coming?  Should all the pension payment holidays in the 80's and 90's taken place?  No.... with hindsight.  But at the time it looked to most people like a fair way of ensuring that companies weren't avoiding tax by lining their pension funds and we were all very happy to take the conservative tax cuts that that policy part funded.

I agree that any M&A activity that was basically a way of releasing pension fund surplus is immoral.  

I think that companies and employees should be forced to make pension provision.

I think that final salary schemes which have the potential to line the pockets of todays pensioners at the expense of current employees and which risk bankrupting companies are wrong.  The equitable life outcome is just wrong.  A minority get a huge pension at the expense of a larger minority who all lose as a result of a stupid promise.

We are at risk of creating a wealthly pensioner class who place high demands on the health service and who control the political agenda because they are a growing population.  Younger working people won't be able to afford to make pension provision while funding the public sector deficit.

There has to be some balance and some personal accountability.

It is totally unfair on people now nearing retirement that this has come about though and I'm really sorry you have been the victim on a number of occassions.

R.

At last, a few thought out ideas. I am not sure I entirely agree with some of this, but I agree with the sentiments. I particularly agree that it is unfair on those who were made promises that now cannot be kept, and by this I mean people who are only receiving a proportion of the benefits that they had accrued when their schemes closed down. This is what the Pension Protection fund and the new debt on employer regulations are designed to stop. It is a shame that it has taken so many people to be affected before these changes were made.

Promises on future pension accrual (e.g. the switch to defined contribution schemes for future service) are a matter between companies and their employees, just like pay cuts, working hours changes or any other part of the employment contract.

If my company changed our pension scheme I would leave and work for someone else. Many of my colleagues would do the same and we have told our employer this. If more people thought (and acted) like this pension provision in the UK would improve very quickly. The only unfortunate side effect is that our pay rises are now crap. Hey ho.

Rafter

Rafter asks what I would do if I couldn't keep a promise - I WOULD HANG MY HEAD IN SHAME.

Is that Japanes style corporate shame where they burst into tears?

Perhaps we need a new law of Corporate Greed and all those senior execs who presided over pension fund raids should be locked up.

I'm fairly idealistic when it comes to the relationship between companies, individuals and government and also fairly pragmatic about each of their ability to predict the future.

I also subscribe to the theory that companies are just a way of organising labour and at the end of the day companies themselves are owned by individuals via pension funds and investments.

I guess the question is should individuals delegate responsibility for their old age to their employer or to the government and to what extent employers and government then owe it to their employees to cover any change in circumstances (longer life expectancy for example) even if that means hurting their current employees or tax payers.

With hindsight I guess they wish they had never made the promise (which seemed low risk in a high investment return environment). I can't hand on heart say I wouldn't have made a similar decision in the same situation.

I'm making damn sure I take some personal accountability for my retirement and am certainly making sure I don't have all my investments tied up in one employer or provider or even country.

I guess that is the learning for me. Nobody should be reliant totally on the pension fund of one employer which is what lifetime service with a final salary scheme means.

You can't have final salary pensions guaranteed because you can't guarantee that the company will still exist.

Is it not better then to have some money purchase type scheme where employer, employee and government all contribute and at least everyone is in the same boat rather than the current winners and loosers situation?

R.

deemy2004

If your going to have a pension then its probably best to manage it yourself i.e. a SIPP.

That way no matter what happens, you can't blame anyone else.

With the whats happened in the past the Government should step in and compensate to a degree say 50% or 75% of what they would have otherwise have got.

Rafter

Peter,

Given that you seem to want a bunch of uninsured trustees with no financial education I'm very glad you think I'm unsuitable to be put in a position of responsibility over a pension fund.

Who in their right mind would do such a thing?

R.

Rafter

The sanity of becoming one.

In any case if a company pension scheme trustee finds themselves facing a deficit and a company that can't make up the shortfall what are they supposed to do? Fall on their swords in guilt? Cry unfair and hope the government will bail them out?

Nobody should be naive enough to believe that trusting their retirement to their employer alone is a good idea. Nor should it be allowed in my view.

I am a strong believer that final salary schemes are actually bad because they are so high risk for both companies and non-retired members or those with slightly lower rights (the Equitable example).

I believe a personal fund to which employer and employee must contribute and which is tightly regulated from an investment viewpoint has to be fairer too all stakeholders.

By all means let the fund aspire to pay 2/3 of final salary at normal retirement age but don't guarantee it. Doing so is making a promise you can't keep and putting some employees ahead of others in the queue.

However, your income at retirement is partly at risk as a result and that is where personal decisions about when to retire of whether to up contributions as retirement approaches come in.

R.

Pal

Ehm, Pal, I think it remains to be seen how perfectly legal and highly regulated these processes are that you talk about.  I don't suppose the FAS will take kindly to some of the processes involved in the wind ups they are currently being asked to consider for assistance.

No it doesn't remain to be seen. It is all published and freely available legislation, Inland Reveue regulations and actuarial guidance notes.

I seem to have heard some of this accrued benefit cr*p before somewhere - oh yeah - the concept that reversionary bonus is somehow a completely robust system for ensuring no one got harmed by an endowment policy.

Well you obviously haven't understood it then. What does final salary pension schemes have to do with reversionary bonuses (which apply to with-profits fund investments)? 

How does that help anyone with an endowment policy now administered by an outfit like Capita for example because the "promise" was transferred away from the company that made it?

What have endowments go to do with pension funds, especially final salary schemes?

The fact is that you and others have made an admitted comfortable living out of pension fund business charges and profits and your concept of the duty of care that goes with it is as described by you in this thread is about as robust as the products you ply i.e. you do not hold yourselves accountable for one iota of it beyond compliance with the law as you or your master sees it from time to time, do you?

Again, in your desperation to blame anyone instead of your own bad luck you are mangling the parties responsible. There is no duty of care as such on advisers because the decisions are the employer's responsibility. They set up the schemes and they can change advisers as they see fit. My responsibility is to provide advice to the employers to keep their pension funds as healthy as possible for as long as possible, dealing with problems as they arise.

If a problem arises that is "Our company is going to go down the toilet and lots of people will lose their jobs unless we reduce our pension fund risk/costs" then sometimes the solution will involve changing future benefit accrual, and in the most extreme cases, it may have involved closing a scheme down and member's suffering. As I have said before, I have never seen the latter done just to boost a companies profits. !!!!!! off employees is not a clever way of ensuring a productive workforce and will almost certainly damage a company more than the old pension scheme did, so it is not undertaken lightly.

This isn't to say that a few rare companies would not do it, but those companies are unlikely to remain successful for very long if that is how they treat their employees. Perhaps this is one of the reasons that your old company is now struggling?

Rafter asks what I would do if I couldn't keep a promise - I WOULD HANG MY HEAD IN SHAME.

Given your comments on this and other threads, I am more inclined to believe that you would simply seek someone else to blame, and in the absence of a good target, would simply blame everyone.

Finally, the only Trustees of final salary schemes that are insured are the exact corporate Trustee companies that you wish to bar from acting as Trustees. Individual Trustees are not insured beyond insurance they can get for fraud against the fund. It is not possible to insure against investment losses or the company going bankrupt.

However Trustees are not liable for the individual losses that the fund might make, their sponsoring employer is, and they can only guarantee the losses while they are still in business. If they go bust, the scheme (and its members) lose out. If Trustees were responsible for the scheme's losses no-one would agree to be a Trustee unless they were being paid for it, and they would also invest all the money in cash to avoid the risk of making investment losses. The pension costs would then go through the roof, companies would immediately close them all down and everyone would lose.

DavidLaGuardia

Dear Peter

You have thrown down your gauntlet over what it a very important issue, and I respect you for that.

What then followed was a discussion where many others tried to deomonstrate why occupational schemes could not continue to exist as they have done. You are welcome of course to take up any of these points.

You have also filed accusation at those who you think responsible for the problems, althoug htis is open to dispute.

What you HAVE NOT done is suggested how you would deal with it. Saying meet the original promises forever and sod every other thingt that this impacts on is not an answer. Nor is meeting the costs of one generation at the expense of everyone else.

I give you ultimate dictatorial powers in this imagenery task.

DavidLaGuardia

I will forgice you any spelling mistakes in this imagenery (sic) task on account of living in a glass house :P

Rafter

Great arguement Peter and I really like the parallel with Lloyds putting its house in order.

I'm not up on the numbers, but I imagine the scale of pension fund liabilities is much larger than even Lloyds losses?

Wasn't the Lloyds situation one where the whole industry shared the problem and collectively put a plan in place to sort it out?

I'm not sure if the well managed final salary schemes would feel it was very fair to contribute to a settlement for poorly managed schemes, and the best the government could do was put in this safety net scheme for future problems but with no retrospective application?

Again because it is not a closed system, how would current employees and shareholders of companies feel about taking the one off hit? I think I disagree with my own point here since current share prices should reflect the existing pension fund shortfalls for individual companies.

Perhaps some form of final salary scheme should continue but with a cap on liability (in the same way that Lloyds is now far more cautious about underwriting huge potential losses)?

So say you get a guaranteed 50% of final salary but with a target of 67%? Or some sort of shared scheme where half the pension is final salary and half money purchase so both employer and employee share the risk that investment assumptions or life expectancy assumptions are wrong?

I think the contributions you would need to make if a pension fund wasn't allowed to invest is shares would be very high. If everything was invested in bank deposits or gilts your fund is still at risk from exchange rate and interest rate movements in any case.

I agree though that perhaps the pension advisors and actuaries are partly to blame and should be held accountable if they have been negligent, in the same way that audit firms are accountable if they sign of an audit for a company which then uncovers major fraud.


Perhaps companies shouldn't be allowed to individually run these schemes to avoid the individual scandals and errors to continue?

Perhaps final salary schemes should be run collectively by big insurance companies and the contributing member companies be jointly responsible for making up shortfalls.

Perhaps pensions are just too big a risk or responsibility for one company to take on?

If we can't trust the government to look after us in retirement and as individuals, money purchase is too high risk then companies or unions are the only collective organisations we can turn to?

R.