Jeremy Warner: Tragedy of UK's system of final salary pensions

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The Independent Online

Outlook First BP closes its defined benefit pension fund to new members. Now Barclays is closing its doors to new accruals too, which is the next stage on the road to closure. The final salary pension, one of the great innovations of the post-war industrial landscape, seems finally to be breathing its last – unless of course you happen to work in the public sector, where these gold-plated pension benefits sail on regardless of the ruination of the public finances.

Tesco still runs a defined benefit pension scheme that remains open to new members, and so does Shell and some banks, but it is hard to think of any other major British company which carries on this noble tradition. Even the mighty Unilever closed its pension scheme to new members last year. Blame it on increased longevity if you like, or even on the inept investment performance of many funded pension schemes, but the main culprit is more easily identified: it's our old friend the UK Government.

As if Gordon Brown's smash-and-grab raid on the tax privileges of the pensions industry wasn't bad enough – removal of the tax credit on dividends has cost the industry a cumulative £60bn since it was done 12 years ago – the Government then proceeded to ring the private pensions industry around with such a bewildering, costly and oppressive array of regulation that most employers have decided it's no longer worth the candle or the risk of carrying on.

Like most regulation, the purpose was well-intentioned enough. In principle, it is obviously right that steps are taken to ensure that companies are able to meet their pension liabilities. Yet by attempting to enforce retirement benefits that were originally offered to employees as a paternalistic perk in reward for long service, the Government has only succeeded in highlighting the true costs of final salary arrangements and thereby hastened their demise.

Ministers' double standards are quite breathtaking in their audacity, for if the same rules were applied to the burgeoning pension liabilities of the public sector the country would be completely bust.

Many companies now find themselves forced by the Pensions Regulator to work solely for the benefit of their pensioners, existing and future. Instead of paying dividends and investing in the business, companies are instead instructed to pay any free cash flow they do generate into funding the pensions deficit. It scarcely needs saying that taken to its logical conclusion, this approach stands ultimately to destroy the sponsoring company, and finish off all chance of funding future liabilities.

It is no wonder that the likes of BP and Barclays have decided that enough is enough. The authorities have made providing such generous pension perks prohibitively expensive for any company that plans to stay in business beyond the next year or two.

Meanwhile, the Government has failed utterly to address the urgent problem of its own pension liabilities, which are shaping up to be an intolerable burden on future generations of taxpayers. The last person to try – by raising the retirement age for public sector workers from 60 to 65 – ended up chickening out. That man was Alan Johnson, now the Health Secretary and widely tipped to succeed Mr Brown if Labour ever finds the balls to ditch him. Lord help us.

Eventually a political leader will emerge with the courage to carve their way through the terrible mess of counter-productive government regulation and public-sector profligacy that has been allowed to develop, but it may take a sovereign debt crisis to make it happen.