Christopher Walker: Pensions: they're a dog's dinner now

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The Independent Online

About 100 people own Britain. On Thursday I hired Edinburgh Castle and asked them to dinner. They are plain-speaking folk, and they control a short trillion pounds of assets. They are the National Association of Pension Funds, guardians of all our futures and proprietors of most of UK plc. Their power is immense. Their mood is mean.

You may be one of those thousands who received a letter last week telling you to change your pension arrange- ments. If you are a man over 54 or a woman over 49, experts reckon you should opt back into the state earnings related system. The argument goes that the Government has got its sums wrong and has not worked out how we are all living. Fortunately for the Government, the funding crisis this will cause is 20 to 30 years away, but the fact that it will happen is none the less clear, and it will be the taxpayer who foots the bill. This is just one of many quakes shaking the UK pensions scene.

How did the Government get itself in this mess? It started with good intentions and clear objectives. Its initial aim was to shift as much as possible of the burden of funding into the private sector, while at the same time ensuring a better deal for poorer pensioners. There was also a desire for greater safety and clarity, and a general attempt to incentivise long-term saving for retirement. In every one of these objectives, policy is off the rails.

FRS17, which started as an innocent accounting change, has evolved into the Götterdämmerung of UK final salary pension schemes, of the type to which most of us belong. Companies are falling over themselves to close their schemes to new members and switch to the new Defined Contributions, allowing them to contribute less. I discussed the changes with the TUC pensions adviser, whose views were blunt: "This is quite simply a pay cut. It will mean ordinary people having smaller pensions. Why is the Government letting this happen?"

This has been bubbling on for years, but New Labour only seemed to wake up to the implications last week. Ruth Kelly, economic secretary at the Treasury, issued a veiled warning to companies, stating merely that pension contributions were important in attracting staff. The TUC is unlikely to be impressed.

A better deal for poorer pensioners not covered in company schemes was supposed to be delivered by the stakeholder pension concept. This aimed to encourage the many millions of low earners who have no savings whatsoever into at least making some provision for retirement. The motives were good but the outcome again is disappointing. Only 700,000 stakeholder pensions have been sold, and it is not clear whether these have been to low-earners.

Clarity is not a word associated with UK pensions. Years of tinkering have been complicated even more by this government. The attempts to improve "safety" have led to an enormous number of regul- ations. This is certainly the case for pension fund managers with ever larger compliance and risk departments. This is likely to multiply in the aftermath of the Unilever pension fund case, which stressed the importance of risk control. Regulations can offer little comfort, and can be no real substitute for a programme of trustees' self-education.

When New Labour came into office the UK pensions system was the envy of Europe. At this stage, it was one of the best prepared to cope with demographic time bombs threatening future funding, and enjoyed a high level of private provision. Unless a more politically aware and less complex policy is developed, the diners in Edinburgh must question whether this legacy is safe in their hands.

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