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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 yes...no. 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.
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