Abuse of final salary pension schemes?

kidmugsy

Tammykitty wrote: »

It also effectively forced people to stay full time, where many people coming up to retirement would actually like to reduce hours

Really? In many schemes if you went to (say) half time working, your salary for pensions purposes wouldn't change, but you'd be credited with half a year's membership instead of a whole year's. Seems fair enough to me.

zagfles

BobQ wrote: »

This debate ignores the bigger picture.

It should not be about public versus private. It should be about the way employers have systematically reduced pensions for everyone. There are still some DB Pensions available to the wealthy and employees who are organised in trade unions have had more success in protecting pensions than those who are not.

As good as public sector pensions are at present they have progressively been attacked through reducing benefits and higher contribution rates. They will probably be reduced again by conversion to DC schemes and reduced employer contributions. Now I can see why those who have legal minimum DC schemes or are low paid self-employed without a pension have no sympathy with this situation but there is a bigger picture.

Ever since Thatcher's Government allowed private sector employers to underfund DB pensions they were in trouble, despite them previously being viable. As employers took holidays and it became all so easy to propagate the myth that they were unaffordable. DC schemes became "popular" not because of affordability but because it became cheaper for employers.

The following link is an excellent summary of the confidence trick inflicted on working people.

http://uk.businessinsider.com/defined-benefit-pension-transfer-wealth-from-workers-to-companies-2016-8

The issue is not DB vs DC but whether Governments are prepared to make employers fund DC schemes sufficiently to provide people with adequate security in retirement. Note in particular that:

"Companies pay five times more in dividends to shareholders than they make in pension investments"

Of course there is another pattern here. From the 1980s, people realised that they did not need trade unions to protect them from employers. They have now reaped what they sowed since those that have retained the better pensions for longer are those with higher trade union membership.

There is nothing inherently wrong with a DC pension that proper funding by employers and employees would not solve. Note that in Australia, the state operated pension scheme is DC and employers are required to contribute 9.5% to it and that is planned to rise. If UK employers were to contribute 9% and employees 9% then people would retire with much more pension.

The next con trick to be perpetrated is that the NHS is unaffordable. The issue is simply one of deciding as a nation that we want to fund it.

What all this rant and the article misses is that in the early 80's, DB schemes were very cheap for companies to run. It wasn't just lower life expectancy, and higher annuity rates, gilt yields, interest rates etc. It was that there was no obligation on companies to even index link the pension if an employee left.

We've had loads of stories on here about people complaining their deferred pension from a company they left in the 80's is worthless because there was no index linking requirement. Companies used to use their pension scheme as golden handcuffs - staff knew if they left their pension would become worthless over time.

People who stayed in DB scheme all their working life did quite well, but those who moved around a lot didn't. That was what the changes in the 80's sought to address. Compulsory revaluation for deferred benefits was introduced. Freedom to invest in other pensions was introduced (that led to mis-selling etc, with hindsight this was badly regulated).

Some employers used pension scheme surplusses to avoid tax, and even up till the late 90's most schemes were in surplus, as Gordon Brown famously used to justify his tax raid (abolishing reclaim of dividends). So right up till the late 90's DB schemes were viable and healthy, and most large companies were offering them, it was in the 2000's when companies started closing them.

The bottom line is it's not simply a case of companies increasing profits at the expense of employee pensions, as is the usual lefty rant. Of course there is some truth in that - but far and away the main reason is that providing a 1/60th final salary pension now is massively more expensive than it was in the 80's, for all the reasons mentioned above and others, and that is far and away the main reason this type of pension is virtually extinct. In the private sector at least.

Had we still had the early 80's rules for pensions, then DB schemes would likely still be affordable. And people would instead be complaining about all the problems people were complaining about back then, and demanding something be done about it.

So don't believe all this fake inter-generation war the likes of Momentum are trying to stir up. Pensions now are in some ways better than they were in early 80's. Ask the Maxwell pensioners. Ask someone whose 20 years' service in the 70's and 80's gets him a pension of £2000 a year. People in average bog standard DC pensions would do better than them today.

BobQ

zagfles wrote: »

What all this rant and the article misses is that in the early 80's, DB schemes were very cheap for companies to run. It wasn't just lower life expectancy, and higher annuity rates, gilt yields, interest rates etc. It was that there was no obligation on companies to even index link the pension if an employee left.

You call my post a rant but yours is no less so. You accuse me of ranting yet the above just summarises what is in the link I posted.

You are ignoring the big picture. DB schemes failed because those who enjoyed them never fought to keep them and because they were never funded to the level required to sustain them. DC schemes progressively replaced them but provided less benefits because employers were allowed to reduce their contributions.

We've had loads of stories on here about people complaining their deferred pension from a company they left in the 80's is worthless because there was no index linking requirement. Companies used to use their pension scheme as golden handcuffs - staff knew if they left their pension would become worthless over time.

And your point is what? That they needed regulating? I agree they did. But many DB schemes were index linked. It was just that they were capped and in those days there was a lot more inflation.

So right up till the late 90's DB schemes were viable and healthy, and most large companies were offering them, it was in the 2000's when companies started closing them.

Many were but what happened was that as inflation declined so did returns on investments meaning that the pensions lacked the income to fund pensions. This would not have been as significant an issue if employers had not exploited their ability not to fund the pension schemes, diverting those funds to shareholders or investment. Had the schemes been in surplus it would not have been an issue. But combine this with effect of Brown's dividend changes (which funds at least could plan for) and over optimistic demographic assumptions and the schemes looked less affordable.

So the schemes were phased out because they had not been properly funded.

The bottom line is it's not simply a case of companies increasing profits at the expense of employee pensions, as is the usual lefty rant.

Had employers simply introduced good DC schemes at the same funding levels then you might have a point. But they introduced less expensive schemes. Calling this a rant does not make it any less true.

Of course there is some truth in that -

So you agree there is some truth in the fact that they were underfunded.

.......but far and away the main reason is that providing a 1/60th final salary pension now is massively more expensive than it was in the 80's, for all the reasons mentioned above and others, and that is far and away the main reason this type of pension is virtually extinct. In the private sector at least.

So why did these employers divert funds to shareholders and introduce cheaper schemes?

Had they just said we are not prepared to accept the risk, but we will pay the same contributions then your point would be more credible. So why did they not maintain the funding levels in the new schemes?

So don't believe all this fake inter-generation war the likes of Momentum are trying to stir up.

My "rant" has nothing to do with Momentum or intergenerational wars and such arguments. My point is that the funding of pensions has reduced over the past 30 years which is why those retiring now are getting better pensions than those that follow.

Auto-enrolment with matched contributions of 3% for employers and employees is just not enough as Australia demonstrates.

Pensions now are in some ways better than they were in early 80's. Ask the Maxwell pensioners. Ask someone whose 20 years' service in the 70's and 80's gets him a pension of £2000 a year. People in average bog standard DC pensions would do better than them today.

Yes I agree that pensions need regulation, employees cannot be trusted to invest enough in them without it being mandatory and employers certainly cannot be trusted to fund them properly without regulations.

As to pensions being better today than in 1980 I think that is an illusion although concede that some employers ripped off their poorly regulated pension funds. But whether you talk of Maxwell then or Green more recently, regulation is needed. In any case whether a pension today is better or worse than then depends on the level at which it is funded.

zagfles

BobQ wrote: »

You call my post a rant but yours is no less so. You accuse me of ranting yet the above just summarises what is in the link I posted.

OK point taken. No ranting.

You are ignoring the big picture. DB schemes failed because those who enjoyed them never fought to keep them and because they were never funded to the level required to sustain them. DC schemes progressively replaced them but provided less benefits because employers were allowed to reduce their contributions.

There were plenty of strikes in the private sector over DB pension closures, I was on strike over ours. People did fight to keep them, although probably not too hard as most people didn't seem to understand their value.

And your point is what? That they needed regulating? I agree they did. But many DB schemes were index linked. It was just that they were capped and in those days there was a lot more inflation.

The point is it adds cost! A lot of schemes were index linked in payment, but not in deferrment. That's how companies used them as "golden handcuffs".

I remember in the late 80's when the rules came in allowing people to opt out of company pension schemes. We had to go to a talk from HR where they did a "hard sell" on how good the company scheme was and they we shouldn't leave. The company was begging us to stay in a 1/60th final salary scheme! Rather than opt out and get a private pension, which would have meant zero company contributions.

A lot of people did opt out, and at the time it wasn't always the stupid decision it might look like in hindsight. For someone in their 20's who thought they'd probably move jobs in a few years, it could make sense to build a private pot which would increase with the 10% or so projected investment returns over the next 30-40 years, and would buy a decent annuity with the 11% or so annuity rates at the time. Rather than the company scheme benefits which would be revalued at (IIRC) just 3%pa (and any transfer value would be based on that).

Many were but what happened was that as inflation declined so did returns on investments meaning that the pensions lacked the income to fund pensions. This would not have been as significant an issue if employers had not exploited their ability not to fund the pension schemes, diverting those funds to shareholders or investment. Had the schemes been in surplus it would not have been an issue. But combine this with effect of Brown's dividend changes (which funds at least could plan for) and over optimistic demographic assumptions and the schemes looked less affordable.

They were less affordable. Just do a bit of maths.

Someone close to retirement on £30,000 in a 1/60th DB scheme.

Every year's service would buy a indexed linked pension of £500.

Index linked annuity rates at 65 with the usual DB scheme benefits such as 5 year guarantee and 50% spouse benefit are under 3%.

So the cost of providing that £500pa pension for one years' service is 500/0.03 = £16,666 !!

So the cost to the pension scheme is £16,666 per year for someone on £30,000, over 55% of salary!

Of course companies don't buy annuities, but even if you use the rule of thumb "safe" drawdown rate of 4%, it still costs £12500 to buy a £500pa pension. So 41% of salary.

For younger people, you need to factor in investment growth but also salary growth. If investment growth = salary growth then it's the same equation, the liability is growing as fast as the investment. But investment growth is usually higher so it's less costly for younger people. But still a very significant cost.

So the schemes were phased out because they had not been properly funded.

And the funding requirement had massively increased.

Had employers simply introduced good DC schemes at the same funding levels then you might have a point. But they introduced less expensive schemes. Calling this a rant does not make it any less true.

Some did, some didn't. Some diverted pension contributions to pay - in our company when they were closing the final salary scheme the union did a survey of pay and benefits and found that people who started after new entrants were prohibited from joining the final salary scheme, their pay was about 20% higher than those doing the same jobs who were in the final salary scheme.

So you agree there is some truth in the fact that they were underfunded.

Of course. But it was mainly because the funding requirement grew, rather than other issues.

So why did these employers divert funds to shareholders and introduce cheaper schemes?

Had they just said we are not prepared to accept the risk, but we will pay the same contributions then your point would be more credible. So why did they not maintain the funding levels in the new schemes?

What, same contribution levels as the early 80's? Under 10% of payroll typically? My DC scheme pays that.

My "rant" has nothing to do with Momentum or intergenerational wars and such arguments. My point is that the funding of pensions has reduced over the past 30 years which is why those retiring now are getting better pensions than those that follow.

It hasn't significantly reduced. Regulations, lower investment returns, indexation requirements, life expectancy, taxation etc etc etc have all made the 1/60th schemes of the early 80's massively more expensive now than they were then.

Auto-enrolment with matched contributions of 3% for employers and employees is just not enough as Australia demonstrates.

Indeed but that's the bare minimum. Until recently employers didn't have to offer a pension at all. That's the problem when you make things like pension compulsory. A bit like the minimum wage. The minimum becomes the norm.

But most companies who previously had generous DB scheme now have DC schemes that are far more generous than the bare minimum. And the employer contributions (certainly in my scheme) are at the same sort of level as they were in the 80's to our final salary scheme.

Yes I agree that pensions need regulation, employees cannot be trusted to invest enough in them without it being mandatory and employers certainly cannot be trusted to fund them properly without regulations.

Which is what the evil Thatcher govt (TM) thought, and why they plus New Labour increased regulations, indexation etc. But the trouble is - it added cost.

As to pensions being better today than in 1980 I think that is an illusion although concede that some employers ripped off their poorly regulated pension funds. But whether you talk of Maxwell then or Green more recently, regulation is needed. In any case whether a pension today is better or worse than then depends on the level at which it is funded.

Well obviously, but the bottom line is that now it costs a lot more to provide the same pension provision than in the past. And also a 1/60th final salary scheme of today (with all the protections) is far better than a 1/60th scheme of the early 80's (no PPF, no statutory indexation, company could almost do what they want with it even take it off you for disciplinary reasons etc).

There's too looking back with rose tinted specs and thinking things were much better in the past and how terrible it is now. There was lots wrong with final salary pensions in the past. That's why governments tinkered with them, to make them better. And in the process, arguably killed them by making them unaffordable.

batrachophagus

It isn't just public sector. I work in the private sector and used to have a final salary pension.


In 2014 they changed the pensionable salary for active members from final salary to 2014 salary + 1% p.a. Deferred members (i.e. left company but not yet retired) get better terms than active members now as they get growth at original terms of 2% p.a.


It is probably hard to have a process that avoids 'unearned' wage increases close to retirement (age discrimination), so the company just penalises everybody that still works for them.

BobQ

zagfles wrote: »

People did fight to keep them, although probably not too hard as most people didn't seem to understand their value.

I think we can agree on that one. Sadly many people no longer fight to keep anything, they just look for another job. With that attitude its best to work for yourself.