Editor's desk: Final salary or final warning?
1 Jul 08
A pension is one of the most important investments you can make, so it's important that schemes are safe. But are they being protected to the point of extinction?
by Rob Outram
Anyone who remembers the debacle of the Mirror Group pension fund and its looting by the late Robert Maxwell will surely agree that company pension funds need protecting. Workers are expected to put their hard earned savings into those funds and they have little or no say in how they are invested, so it’s appropriate that there are safeguards in place to shield those savings from dishonesty, incompetence or
just bad luck, But are we in danger of shielding pensions to the point of suffocation? Over the past few years the defined benefit (DB) pension scheme has become increasingly rare. If not as dead as the dodo, it is certainly heading towards endangered species status.
Occupational pensions have endured multiple shocks: economic conditions have eroded the value of their investments; as Chancellor, Gordon Brown eroded their tax status; and increased longevity has added to their liabilities. To cap it all, financial reporting reforms in the shape of FRS 17 and IAS 19 have ensured, arguably with logical justification but certainly to the discomfort of their sponsoring companies, that pension scheme liabilities have a highly visible impact on the bottom line.
It makes sense that the Pension Protection Fund, set up to provide a safety net for employees who risk losing retirement benefits if their employer becomes insolvent, should be funded from a levy on pension schemes as a whole. It also makes sense that
the levy should be based not only on the size of the scheme concerned but also on its risk factor, so that well-funded schemes end up paying a smaller amount. In practice, however, the bills soon to be landing in FDs’ in-trays will give them one more reason to look for an exit.
Even worse, according to actuaries Lane Clarke & Peacock, because of the way the levy is calculated the PPF could end up raising £837m rather than its intended £675m.
It seems that those few DB schemes remaining in existence will be better protected than ever. The question is, how many people will be in such schemes in the foreseeable future? Finding one open to new entrants is already almost as hard as finding an NHS dentist.
I’d like to focus on two specific issues. One is that the crucial role of trustees is in danger of being undermined by the difficulty in finding volunteers for the posts. This is partly because increasingly, finance directors and other senior company personnel are concerned about facing conflicts of interest as trustees are being encouraged to ask difficult questions about funding and the “employer covenant”.
It’s also a response to the increasing responsibilities of the pension fund trustee. We are asking a lot of the board of trustees.
There is a strong argument in favour not only of professional, remunerated independent trustees – just as company boards have non-executive directors – but also for some kind of remuneration for the member-nominated trustees.
The other is that, anecdotally, those putting corporate recovery packages together are increasingly finding that pension schemes can be an obstacle. As Christine Elliot, chief executive of the Institute for Turnaround said at the ICAS Corporate Recovery and Turnaround Conference, held in Glasgow last month: “People are walking away from deals because there is a defined benefit scheme involved.”
Now, while it’s quite right that pension funds should not be exposed to corporate raiders, if companies are potentially going to the wall because of the pensions regime, surely this is crying out for an imaginative solution and a compromise to ensure that pensions are not being protected out of existence?