William Kay: Pensions don't come from a pot at rainbow's end

The rush by employers to abandon final-salary pension schemes in favour of defined-contribution is in danger of turning into a full-scale crisis for the Government, for two reasons, widespread ignorance and even wider-spread reluctance by most people to pay towards their old age.

Money net

The rush by employers to abandon final-salary pension schemes in favour of defined-contribution is in danger of turning into a full-scale crisis for the Government, for two reasons, widespread ignorance and even wider-spread reluctance by most people to pay towards their old age.

Final-salary (FS) schemes are those in which retirees' private pensions are decided by taking their salary on retirement and paying a proportion of that linked to years of service. Most schemes pay one-60th for every year worked, so that someone with 30 years' service would retire on half-pay. But some pay only one-80th per year, so half-pay would take 40 years.

Defined-contribution (DC) schemes make no promises about the size of the pension. That depends entirely on how much has been contributed, by individuals and their employers, and how well that money has been invested and/or how well the stock market has performed.

But while DC schemes are overtly tied to the stock market, it is an illusion to think FS schemes are immune.

Over the years many companies have taken holidays from making pension contributions because the funds were sprouting so much profit from – where else? – stock market investments.

This meant that workers were denied a share of those profits, because their interest went no further than ensuring they received the correct proportion of final salary.

Conversely, in bad times companies have had to make up shortfalls in their pension funds, to meet the FS promises. But that did not make the workforce immune from the stock market or a recession: in extreme cases, the pension commitments could bust an employer or lead to redundancies which automatically restricted FS scheme pensions to an employee's salary on leaving the firm, possibly decades before retirement.

So the exposure to stock market vagaries is always there in FS schemes, because that is where pension money is invested, along with property and one or two other havens.

But, like the now-derided with-profits bonds and policies, the profits from FS schemes are so disguised that employees have been deluded into thinking their pensions come from a pot at the end of the rainbow.

That happy arrangement can continue in DC schemes, though the Government must stop employers paying less into DC schemes than into FS. There is no excuse for cheating employees in this way.

The latest buzzword is "transparency". That is what the Financial Services Authority is always demanding, and that is what the controversial FRS17 accounting standard insists upon, because it makes companies set pension gains or losses against their operating profits, something many can ill afford when profits are under pressure from competitors, consumers and regulators.

The bigger problem for Whitehall is that DC schemes also force transparency upon employees, in that they make them open their eyes and face reality about what level of pension their contributions will give them. No longer can the question be brushed under the carpet of the pension trustees' office. But knowingly paying for a pension, like paying for virtually any other financial service, is anathema to most people in Britain.

This may not be a problem for Tony Blair, but it could blow up in the face of one of his successors 10 or 20 years hence, when years of under-contribution produces a generation of poverty-stricken pensioners. The apathy which has greeted stakeholder pensions is merely a foretaste.

The alternative is to step up compulsory state pension contributions, otherwise known as tax. Any prime minister willing to bite that bullet will have to have very strong teeth.

 

 

THE PRICE of gold has quietly slipped back below $300 an ounce after one of the regular bouts of hysteria leading to ill-judged recommendations to invest in bullion, gold mines or funds devoted to those sectors.

Much of the recent upward blip was a precautionary move by traders against Japanese savers scrambling to turn endangered bank deposits into gold bars.

Demand this winter has also been boosted by the apparent requirement by Osama bin Laden's al-Qa'ida organisation to shift resources out of Afghanistan into safer and more friendly countries.

Any commodity, however precious, that is being actively bought and sold by panicky bank depositors and shifty terrorist organisations should be severely left alone by all but the most speculative investors.

 

 

MAGGIE DRUMMOND'S latest report (see opposite page) on the outrageous behaviour of some overseas car hire outlets highlights a grave gap in the law.

We are all used to giving our credit card details to hotels as a surety against damage or forgetting to pay: we do not subsequently expect to find them charging for extra nights or meals unordered.

But it transpires that car hire firms regularly betray our trust in a similar way, and apparently all the Office of Fair Trading and trade bodies can do is to pass the buck.

Patricia Hewitt, the Secretary of State for Trade and Industry, must act swiftly to close this loophole.

w.kay@independent.co.uk

William Kay is personal finance editor of 'The Independent'

Independent Partners: 10 top tips for retirement. Get your free guide here

PROMOTED VIDEO
News
peopleStella McCartney apologises over controversial Instagram picture
Voices
voices
Arts and Entertainment
Hayley Williams performs with Paramore in New York
musicParamore singer says 'Steal Your Girl' is itself stolen from a New Found Glory hit
Sport
Ronaldinho signs the t-shirt of a pitch invader
footballProof they are getting bolder
News
William Hague
people... when he called Hague the county's greatest
Extras
indybestKeep extra warm this year with our 10 best bedspreads
News
people
Voices
voicesBy the man who has
News
people... and stop them from attacking people
Arts and Entertainment
Ed Sheeran performs at his Amazon Front Row event on Tuesday 30 September
musicHe spotted PM at private gig
Sport
Arsene Wenger tried to sign Eden Hazard
footballAfter 18 years with Arsenal, here are 18 things he has still never done as the Gunners' manager
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Trust Accountant - Kent

    NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

    Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

    £18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

    Law Costs

    Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

    Day In a Page

    Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

    The children orphaned by Ebola...

    ... then rejected by surviving relatives over fear of infection
    Pride: Are censors pandering to homophobia?

    Are censors pandering to homophobia?

    US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
    The magic of roundabouts

    Lords of the rings

    Just who are the Roundabout Appreciation Society?
    Why do we like making lists?

    Notes to self: Why do we like making lists?

    Well it was good enough for Ancient Egyptians and Picasso...
    Hong Kong protests: A good time to open a new restaurant?

    A good time to open a new restaurant in Hong Kong?

    As pro-democracy demonstrators hold firm, chef Rowley Leigh, who's in the city to open a new restaurant, says you couldn't hope to meet a nicer bunch
    Paris Fashion Week: Karl Lagerfeld leads a feminist riot on 'Boulevard Chanel'

    Paris Fashion Week

    Lagerfeld leads a feminist riot on 'Boulevard Chanel'
    Bruce Chatwin's Wales: One of the finest one-day walks in Britain

    Simon Calder discovers Bruce Chatwin's Wales

    One of the finest one-day walks you could hope for - in Britain
    10 best children's nightwear

    10 best children's nightwear

    Make sure the kids stay cosy on cooler autumn nights in this selection of pjs, onesies and nighties
    Manchester City vs Roma: Five things we learnt from City’s draw at the Etihad

    Manchester City vs Roma

    Five things we learnt from City’s Champions League draw at the Etihad
    Martin Hardy: Mike Ashley must act now and end the Alan Pardew reign

    Trouble on the Tyne

    Ashley must act now and end Pardew's reign at Newcastle, says Martin Hardy
    Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

    Isis an hour away from Baghdad -

    and with no sign of Iraq army being able to make a successful counter-attack
    Turner Prize 2014 is frustratingly timid

    Turner Prize 2014 is frustratingly timid

    The exhibition nods to rich and potentially brilliant ideas, but steps back
    Last chance to see: Half the world’s animals have disappeared over the last 40 years

    Last chance to see...

    The Earth’s animal wildlife population has halved in 40 years
    So here's why teenagers are always grumpy - and it's not what you think

    Truth behind teens' grumpiness

    Early school hours mess with their biological clocks
    Why can no one stop hackers putting celebrities' private photos online?

    Hacked photos: the third wave

    Why can no one stop hackers putting celebrities' private photos online?