BBC On The Record - Broadcast: 03.03.02

Film: Film on Pensions. David Grossman looks at why an increasing number of companies are closing their final salary pension schemes for employees and why the Government's stakeholder pensions have failed to take off.

DAVID GROSSMAN: Poole Harbour where the boats cost more than a house and the houses cost the earth. This is pretty much as good as it gets for British pensioners. No talk of autumn years here - this is very definitely the high life. If life were really like a pensions advert we'd all spend our retirements like this. The cares of working for a living banished in favour of far gentler worries, like whether to cruise to St Tropez for the season or Monte Carlo for the Grand Prix - ah decisions, decisions!. Not many of us can expect our pension to run to a two million pound gin palace like this, but we do all at least hope that our retirement will be a comfortable ride and for many the means of achieving that has been the final salary pension scheme run by an employer. But British companies are closing such schemes to new members at unprecedented rates and the government's accused of hastening that trend by loading extra regulation and taxes onto pension funds and worse, critics say the government's whole pensions policy is a hopeless tangle. FRANK FIELD MP: There's absolute chaos awaiting us even on this level as the years go by on pension provision and at some stage the government's got to go back to the drawing board. GROSSMAN: Amid all the confusing detail, there are basically only two main types of pension. Arguably the best is a final salary scheme run by an employer. It's like, well, a great big bucket. While we are working, we throw in a bit, our employer puts in a bit and when it's time to stop work, we draw a pension that's a proportion of our final salary determined by how many years we've been contributing to the scheme. But crucially it's up to the employer to make sure there's enough in the pension fund to pay for everyone. The other main type of pension is a money purchase scheme. It's like a little individual bucket. While we're working we put in what we can, our employer may or may not contribute and when it's time to retire, whatever we've managed to collect, well, that has to provide our pension and with stock markets on the slide, that can be a bit disappointing. ROGER LYONS: If nothing's done about this situation, then there will be millions of people who thought they were looking forward to a comfortable old age, on an occupational pension scheme, based on final salary, who now find that with a much lower contribution from their employer, they are facing pensioner poverty. PROFESSOR STEVE WEBB MP: If you look at pensioners in retirement today who have a good standard of living, the vast majority of them are building that on a final salary pension. They're getting a pension that relates to what they were earning just before they retired and it allows them to carry on the sort of standard of living they had when they were working into retirement. That's what pensions are for and a good final salary scheme is the gold standard of pension provision. GROSSMAN: Most of these pensioners in Bournemouth have already struck gold, their generous final salary schemes mean that instead of worrying about the future they can instead concentrate on trying to hit the little yellow jack. But such schemes are closing to new members in record numbers. In fact, the National Association of Pension Funds found that ten per cent of final salary schemes they surveyed, closed to new members last year alone. Many of these companies are huge high street names with tens of thousands of people in their pension funds so why are they doing it? Well we tried to get them to talk to us. Abbey National are closing their final salary pension scheme to new members next month, so would they like to give us an interview to explain why? Well, no, they wouldn't. Marks and Spencer are closing their scheme in April, so would M&S say Neither would Barclays provide us with an interview. And when we called BT to asked them for an explanation they decided it wasn't all that good to talk. In fact, we tried Sainsburys, Lloyds TSB, Legal and General and Iceland and every time got the cold shoulder. PETER THOMPSON: Companies are facing a lot of pressures on final pay schemes and they have been doing in recent years. A lot of these are to do with increasing cost. Increasing cost has arisen from a number of directions, for example people are living longer on average. Investment returns have been negative for the last two years. Long term interest rates have fallen a long a way. In addition to that there's the huge burden of regulation, which means that lot of companies are finding final pay schemes too expensive and too complicated to continue operating. GROSSMAN: As well as government regulation, the accountancy rules of the pensions game have also changed. A new regulation going by the innocent, if rather dull sounding name of FRS 17, forces companies to put details of their pension funds in their annual accounts in such a way as to frighten the life out of shareholders. FIELD: The accountancy profession has ruled that company pension schemes liabilities, should be presented into company account in a particular way, over a short period of time, at the worst possible time of the economic cycle, those debts should actually be put on the books and increasingly firms are saying, we're not prepared to take this risk anymore, we're minimising those risks and once some firms start doing it, there's rather like a sheep effect, everybody starts to follow. GROSSMAN: Pensions have also been targeted by the Chancellor as a source of revenue. In 1997 Gordon Brown changed the tax rules so that an extra five billion pounds a year goes to the Treasury from company funds. On top of extra regulation and falling investment returns, many firms feel this tax means they can no longer afford to play the final salary game. FIELD: Board members have said, there are many and easier cheaper ways to run pension schemes and if the government is going to take this sort of money each year out of pension savings, we will adjust and we will adjust by cutting the level of pensions which are being paid and that is now actually happening. To adapt a famous phrase, there's no such thing as a free tax. You levy it by government and then other people will seek ways of making sure the tax is passed on and this tax has been passed on to cuts in pensions. GROSSMAN: Having a few pounds left at the end of the week for a game of bingo is all many pensioners can hope for. Pensions though shouldn't be a gamble. The evidence suggests that the move away from final salary schemes will leave more and more people with less and less money to spend in retirement. The accountants KPMG calculate that on average money purchase pensions are a second rate option and will pay out 30% less than final salary schemes and that will make a huge difference to retirement in the future. LYONS: In practical terms it means that instead of looking forward to a holiday, foreign holiday each year as a pensioner, they'll be lucky if they get a coach trip one day away from home, and that kind of change means that instead of looking after their family as pensioners, perhaps providing some goodies for their grandchildren, they'll be hoping their grandchildren can look after them. THOMPSON: One thing that a lot of companies do when they move away from final pay schemes towards money purchase schemes is to actually contribute less, sometimes a lot less, to the money purchase scheme than they were contributing to the final pay scheme. GROSSMAN: Not only is the government accused of not doing enough to prevent the disappearance of final salary schemes that would have made many future pensioners comfortably well off. It's also argued that the government's plans to help the low paid have a decent retirement are also seriously flawed. To try to make more people into pensions winners the government introduced the stakeholder pension. Where before picking the right scheme was complex, stakeholder was designed to be pensions made easy and at a very low administrative cost. They were brought in last year and targeted at the three million people who have no other form of pension available to them - critics though say they've fallen well short. LYONS: The whole statutory framework for stakeholder pensions was based on a very good idea, however the government I think got cold feet over the whole stakeholder approach and they didn't really want to force employers to pay a minimum satisfactory contribution. THOMPSON: What evidence there is so far seems to suggest that employers are not actually contributing very much to stakeholder pensions in most companies. In a lot of companies, they're simply offering them as a vehicle for employees to make contributions, without the employer offering anything, but a lot of those stakeholder pensions are simply in practice are empty shells with nobody actually contributing. GROSSMAN: Justin Urquart-Stewart makes a living trying to predict the future. He's an independent financial advisor who visits the pensionless in order to shore up their finances for retirement. More and more he's finding people are totally unprepared. Today he's visiting thirty-two year old Phillip O'Gorman. Philip works for an events management company in London. The consultation starts with an all too common confession. JUSTIN URQUART STEWART: So what kind of pension scheme do you have at the moment? PHILIP O'GORMAN: Well actually I don't have one. URQUART-STEWART: Whoops, nothing at all? O'GORMAN: No. URQUART-STEWART: Oh dear, but I mean your employer must have offered you something surely. O'GORMAN: Yes. We've been offered stakeholder pensions. URQUART-STEWART: Right, has anybody taken it up? O'GORMAN: Not that I'm aware of. GROSSMAN: So Phillip's not tempted by a stakeholder pension and nor it seems are the government's target group. Most stakeholders say critics have actually been taken out by wealthier people looking to minimise their tax bill URQUART-STEWART: They've really actually been of most benefit to high net worth grannies because what they've done is actually been able to use the scheme to be able to pass money down from them to their grandchildren tax free. DAVID WILLETTS: Well they've sold maybe five hundred thousand plus stakeholder pensions but by the time you remove the people who've taken...who've moved in to stakeholders from other pension arrangements, the well advised who've taken out stakeholders for their non working wives or for their grandchildren, you get a tiny proportion of people in the government's target group, taking out a stakeholder pension. In fact I think that they may have sold fewer stakeholder pensions to their target group than they've created life peers. GROSSMAN: So, if we can't rely on the state or our employers to keep us afloat in retirement, barring a lucky lottery win that pretty much leaves self reliance as the only option. But knowing that we have to save and actually putting the money aside month after month are two very different things and as a nation we're not terribly good at planning for the future. According to research from the Association of British Insurers the savings gap is huge. It's estimated that we're saving twenty-seven billion pounds a year less than we need to and to close this gap we need to increase the amount we save by fifty-four per cent. WILLETTS: Probably the most worrying single statistic about the British economy at the moment, is the amount that we as a nation are saving. Households are saving at historically low levels, and that means that when people retire, they simply won't have the incomes that they expect to enjoy, and that's a very serious long term problem. THOMPSON: The government may have to move towards compulsion at some point in the next few years. The difficulty then will be to strike the level at which compulsion is fixed, whether it's a low level in which case it may not make much difference to people's retirement income or whether it's at a higher level, which might produce problems for some companies or employees in affording that amount. O'GORMAN: So how much money would I need to invest in a pension in order to have a salary of forty-five/fifty thousand pounds when I retire? GROSSMAN: The young often have high expectations of where they'll be in retirement, without a final salary pension scheme to guarantee the future it's actually very hard to collect the huge sums needed on our own and the sums are quite shocking. URQUART-STEWART: Then you'd actually need to amass at the moment the sum of five-hundred and twenty thousand pounds, ie over half a million pounds to buy thirty thousand pounds worth of income each year and bear in mind you've got to pay tax on that as well. O'GORMAN: Okay, I didn't know that. GROSSMAN: So we can forget the jet set fantasy and it may be that without urgent action on pensions, even a modest lifestyle in retirement will be beyond the means of tomorrow's pensioners. Future pensions have never really been a priority of any government, because the politicians know they'll be long gone and out of sight by the time their policies are ever properly tested.
NB. This transcript was typed from a transcription unit recording and not copied from an original script. Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, the BBC cannot vouch for its accuracy.