The sad tale of UK pensions

A SHORT HISTORY OF UK PENSIONS AND SAVINGS - FACT AND SPIN.

Fact and Spin.

There is a strong tendency for commentators and pressure groups to put their own 'spin' on events that have affected our pensions and savings. It would appear that a good example of such spin has emerged very recently.
Gordon Brown's '£5 billion p.a. tax raid on pension funds' appears to have been exaggerated, both in its amount and relative impact.
A figure of £5 billion has been seared into the public consciousness by a blizzard of publicity from the press, lobbying bodies such as the CBI, opposition politicians and of course, the financial markets.
New research by the independent Pensions Policy Institute seems to reveal that the impact of Brown's 1997 tax changes, removing Advanced Corporation Tax relief for pension schemes, cost schemes not £5 billion, but between £2.5 and £3.5 billion. Furthermore, the Treasury did not grab the disputed money, as it reduced corporation tax at the same time, enabling companies to retain more profit, some of which could have been ploughed into enhanced pension contributions and higher investment levels. Instead, it appears to have been spent on such things as an orgy of risky M&A activity. The net income to the Treasury from the 1997 tax changes was nil, so the idea that Brown was raising taxes to swell his coffers appears to be wrong.
This is hardly what the anti-Brown propagandists have been putting about - the main purpose of the combined tax changes was motivated by a desire to encourage companies to retain and re-invest more profit (unsuccessful, as it turned out). However.... we wonder if Mr. Brown would have acted differently if he had the foresight to see all the other negative forces that have affected pensions over the same period.

Here are some Facts about our Pensions and Savings....

First, the grossest malfeasance of the lot - North Sea Oil.

Norway has a $210 billion surplus in its State Petroleum Fund (now known as the Government Pension Fund). It is a country whose inhabitants will never be poor.

In 1975, then industry minister Tony Benn inherited a situation under which licenses to exploit North Sea oil had been granted without any provision for oil to meet UK needs. He responded by setting up BNOC - the British National Oil Corporation - to direct North Sea oil funds towards social and industrial regeneration. The Norwegians set up Statoil to do the same thing. Statoil still works very efficiently for Norway today and is a respected centre of oil exploration and recovery know-how.

Alas! Not in Britain. The incoming Conservative government sold off BNOC. The then energy minister, Nigel Lawson, declared that Britain's oil policy was to have none. If we'd had any sense, and were not driven by inappropriate (in this case) free-market dogma, we would have:

• A decent state pension provision • A more balanced economy, not precariously dependent on the property market, consumer debt and inward investment. We might also have had a thriving industrial and high-tech economy. • A better transport infrastructure (you should experience what they have done in Norway).

The full story

• Originally, the Basic State Pension was linked with average earnings.
• In 1975, the Social Security pensions Act introduced a basic State pension and an additional pension (State Earnings Related Pension) related to an individual's earnings over a career. SERPS was implemented in 1978. The original ceiling for SERPS was 25% of average lifetime earnings. The intent was to ensure that all those who had performed paid work in their lifetimes would receive more than the basic state pension.
• From April 2000, the original SERPS formula of up to 25% of lifetime earnings was deemed to be too expensive, and has been reduced to a maximum of 20%.
• In the 1960's and 1970's governments encouraged company occupational pension schemes through tax breaks on contributions and dividends received from investments.
• During this period, many companies, believing that it was their duty to look after employees' long-term interests, made membership of their final salary occupational schemes compulsory.
• In 1980, the Basic State Pension link to earnings increases was replaced by a link to price inflation. This was, and is still seen by many as a regressive move, steadily reducing the value of the state pension. (Oh, for that oil revenue!).
• In 1988, the government introduced Personal Pensions - seen by many as bringing a desirable element of choice and flexibility into pension provision. At the same time, compulsory membership of occupational schemes was outlawed and personal pensions were heavily promoted by government and the pensions industry.
• The introduction of personal pensions resulted in the first of many orgies of deception and mis-selling by the Financial Services industry. It is estimated that the whole personal pension disaster resulted in more than £15 billion in compensation and affected literally millions of people. It was also a seminal event in creating high levels of justifiable distrust in the financial industry that has subsequently been fed by scandal after scandal. Government can take its share of blame for failing to regulate the industry and and take any responsibility for educating or supporting the population.
  Only in 2007 is government considering what might be done to provide people with education, support and advice in their personal finances.
• The whole farrago was exacerbated by the unwillingness of many private pension providers to compensate those they had misled - cases took years to resolve, and some companies were eventually fined for dragging their feet.
• As the long Stock Market boom took shape in the early 1990's, occupational schemes began to run up large surpluses - and companies responded by reducing their pension contributions, encouraged by government restrictions on large surpluses. In fact, a Conservative government taxed any surpluses above 5%. This was a disastrous move, as the stock market is volatile and surpluses can disappear, but much more so because companies simply returned the surpluses to investors or indulged in a value-destroying orgy of acquisitions and mergers. Many companies ceased to make any contributions at all, so when the market plunged, they were habituated to low-cost pensions and responded to a long-term problem by knee-jerk closures of defined benefit pension schemes.
• The long boom period saw outbreaks of 'irrational exuberance' in Stock Markets and in the actions of companies. The net effects of the dot.com and technology booms and the huge increase in massively value-destroying M&A activity destroyed huge amounts of investors' wealth (estimated at over $25 trillion in the USA - and $25 trillion would buy a lot of pensions!) and built the conditions for a disastrous financial markets crash. It can only be a matter of speculation as to what might have happened if companies had behaved more prudently and been allowed to amass higher pension fund surpluses to protect against the inevitable crash, and investors been more restrained and sane.
• Chancellor Brown introduced his already mentioned removal of relief from Advanced Corporation Tax relief for pension schemes in 1997. This move appears to have been less negative in its effects than some lobbyists would have us believe, but nevertheless reduced some pension schemes' income from dividend payments by 20%, and provided an excuse for many companies to close their final salary pension schemes. (Dividend Payments form on average about 20% of a pension scheme's income).
• 2001/2 saw the Stock Markets go into reverse after a long boom. The crash wiped out pension fund surpluses and led in many cases to substantial deficits. This effect was exacerbated by the fact that many occupational schemes had taken lengthy contribution holidays.
  It is estimated that companies saved over £20 billion in pension contributions withheld during the stock market boom years - of the same order of magnitude as Gordon Brown's tax raid - but not as well publicised!
• The State Pension age for women was increased from 60 to 65 in 2000.
• June 2001 - changes in accounting rules meant that companies had to report pension deficits (or surpluses) in the year the deficit occurred, despite the fact that pension funds and their investment requirements should be seen over long periods.
• The net impact of the Stock Market crash, the sudden emergence of large deficits in under-funded schemes, Brown's tax actions, investor pressure for profits and dividends and changes in accounting rules led many companies to close their Defined Benefit pension funds to new members. (A Defined Benefit Scheme involves a company making a long-term commitment to provide a pension of a percentage of salary). Many companies have instituted Defined Contribution Schemes, (in which employees and the company contribute agreed sums, but no commitments are made as to the eventual pension outcome) instead. The key difference between Defined Benefit and Defined Contribution Schemes is that the investment and financial risks move almost entirely from the company to the employee. Thus many peoples are finding that in addition to the growing pressures and uncertainties of their working lives, they now have to face additional risks in their pension provisions.
• At a broad estimate, over 50% of companies providing Defined Benefit Schemes have closed them to new members. This must represent one of the greatest changes in companies' attitudes to employee welfare in living memory, and is almost entirely a private sector phenomenon. It is probably the greatest example of corporate irresponsibility since the private pension mis-selling scandal.
  
  NB: most directors' pension provisions have not been reduced in line with those of employees.
• 2000 and onwards - 'discovery' that we are living longer and that this will have a marked effect on our pensions, costing much more to fund income for longer life-spans. One of our informants, an experienced pension manager, contends that the government actuaries were very slow in drawing attention to this most predictable of trends.

So.......... we hope that you will see that the Pension Crisis is not all Gordon Brown's fault, or simply a result of increasing life expectancy. Many actors have played on the pension stage, and in quite a few cases with little honour or distinction.
Working people in Britain are faced with an investment industry that is actively hostile to putting employees first, employers that dance to the tune of investors, a financial services industry that has manifestly lost the confidence of the bulk of people and deservedly so, and a government that is scratching its head about what to do. Adair Turner's National Pension Savings Scheme is a good initiative, and something of a tribute to the current government, especially if the insurance industry is prevented from getting their hands on pension savers' money.

But, just think what might have been if we, like Norway, had a few £hundred billions in the national pension coffers.