You are here:   Columns >  Open Season > Pension Pretense
 

The envy of the world: that, or so we were told, was the great British pension. Like the BBC or the National Health Service, this was an institution so much admired by foreigners that none of them dared copy it. We could sit at a desk for fifty years and hang our hat on a pension, worth two-thirds of our final salary — and all without apparent effort. It was an illusion.

Now, it has been shown the door by Royal Dutch Shell. This was the last of our hundred biggest companies (as measured by the FTSE index) to link its pensions to final salaries. The scheme will carry on — pension schemes do — but will be closed to new entrants. Shell, unlike some of its peers in the index, is big and strong enough to run whatever kind of pension scheme it still believes to make sense, and its verdict is decisive. 

Gone for ever are the happy days when pensions seemed to grow on trees. The pension funds were so rich that their sponsoring companies took to giving themselves holidays and paying nothing in. Their employees took no holidays, but their money went into a pool and was subject to a process of cross-subsidy. Broadly speaking, those who moved on paid for those who stayed put and the shop floor paid for the boardroom. 

Those who got sacked were the biggest losers of all. In the pension funds' pitiless jargon they were classified as early leavers. A surplus director, by contrast, might be given early retirement on full pension, boosted by a timely increase in his final salary. It would help if his colleagues were the pension scheme's trustees. The funds themselves became unannounced targets for takeover bids. In the end, Robert Maxwell, needing  to raid his own fund, took one short cut too many.

What had made the trees so fruitful? First of all, a tax climate that served as a sun-trap. Companies' payments to pension funds could be offset against tax, but were not taxed in the funds' hands, and bore no tax at all until they came out at the other end as pensions. Even then, some might escape as a tax-free lump sum: "A much-loved anomaly," said Nigel Lawson, who as Chancellor would have liked to get his hands on it. 

Then the markets themselves came up with a record-breaking harvest. The 1980s and '90s were wonderful years for investing in shares, and reached their peak at the end of the century. No wonder that Gordon Brown seized the chance that eluded his predecessor. He coolly withdrew the tax credit from dividends received by pension funds — a technicality worth £5 billion a year to the Exchequer. That was the day when the sun went in and the trap closed.

This century has been harder. Share prices have gone nowhere or gone backwards, to leave the index down by about one-sixth from its peak. In real terms (that is, allowing for inflation) far more has been lost, and pension schemes have to allow for inflation. Government stocks have had their overdue day in the sun — but by a quirk of the actuaries' arithmetic, this has only served to widen the pension funds' deficits. 

Meanwhile, more is asked of the funds. The beneficiaries are inconveniently living longer. The schemes that are still solvent must now bail out those that aren't, and the sponsors who stand behind them watch the bills mount up. Too late, they find out that they are now in the life assurance business, which, as the Equitable Life's example shows, is not as easy as it looks. Some find that their business now comes second in the order of magnitude. British Airways was well known to be a life office with wings, and had trouble staying airborne. Others find that their pension schemes eat up the funds that they need for their own reinvestment, and their own survival. 

View Full Article
 
Share/Save
 
 
 
 

Post your comment

CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.