Ian McConnell: Jealousy of public sector will not solve grim pension poverty

As if these figures were not stark enough, particularly given many private as well as public sector employees retiring this year will have benefited from long periods in final salary schemes, a report from pensions consultancy Lane Clark & Peacock (LCP) was in many ways even more alarming.

Crucially, it underlined the impact of companies’ decisions to abandon final salary or similar defined benefit pension schemes and replace these with defined contribution (sometimes referred to as “money purchase”) arrangements.

The corporate exodus from final salary pension schemes, which for decades have given employees certainty of a decent income in retirement, has coincided with government moves at a UK level this millennium to try to widen saving for retirement, with the launch of stakeholder pensions and then automatic enrolment.

However, while the minimum contributions required from businesses have been increasing following introduction of auto-enrolment, they remain relatively small, at just 3% of salary.

The simple fact of the matter is that, generally, final salary or similar defined benefit schemes involve far, far greater contributions from companies.

It seems a very long time ago indeed that Sir George Mathewson, as chairman of Royal Bank of Scotland in 2002, was highlighting huge benefits to the institution of having a non-contributory final salary pension scheme. In particular, he flagged its value in making staff willing to give more of their energies.

On the question of whether the bank would abandon its final salary scheme, Sir George declared back in 2002: “The bank has a long-standing contract with the staff, which is an emotional contract and is very much to our benefit.”

These were heartening words, at a time when there was generally much greater hope that many companies might, even as attention focused on yawning deficits on final salary schemes, stick with defined benefit arrangements for all staff.

The Royal Bank scheme about which Sir George was enthusing, which closed to new members in 2006, does remain open to accruals for employees who joined before that date, with increases to pensionable salary having been limited, a rise in the normal pension age, and staff contributions phased in.

The LCP report highlights the fact that the number of private sector workers still building up pension rights under salary-related, defined benefit schemes now stands at only around one million.

The dramatic decline in such pension provision by companies is utterly lamentable but not at all surprising. For some companies, it may have been truly difficult to sustain a final salary scheme but for many the move to money purchase arrangements, some but not all of which are paltry, will have been a choice. It has been a further manifestation of the cost-cutting sickness and short-termism that seems to feature far too much in corporate life in the UK, and of course in plenty of other countries such as the US.

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The LCP paper, entitled “The Ski-Slope of Doom”, observes that every year around three-quarters of a million people in the UK reach state pension age. It notes “their regular income at this point is made up of a mixture of state pension, salary-related defined benefit (DB) occupational pensions and income from more modern ‘defined contribution’ (DC) or ‘pot of money’ pensions.”

It is worth noting in this context that huge numbers of people who have joined the workforce in the new millennium will not, when they reach retirement, have any defined benefit provision.

The LCP report declares: “For many decades, the best retirement outcomes have been achieved by those able to supplement their state pension by a substantial salary-related occupational pension. But whilst such pensions remain the norm in the public sector, the number of private sector workers building up such rights has declined steadily and now stands at only around one million. Instead, most workers today, including most of those newly ‘automatically enrolled’ into workplace pensions, are building up defined contribution pensions which will provide them with a pot of money at retirement. Until now, the assumption (or hope) has been that the ‘legacy’ of past service in DB pensions will tide us over until new DC rights grow to take their place. This paper dispels that myth.”

It is an important “myth” to dispel, if the problem is not to become even worse, and the LCP report makes very astute observations as it sets out some unpalatable figures on future pension projections.

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LCP declares: “The message of our report is clear. Current plans to replace disappearing DB pensions by new DC savings are wholly inadequate. Without a greater sense of urgency, a whole generation of people will experience a worsening retirement outlook.”

The consultancy’s paper states: “We argue that past projections of retirement incomes have been distorted by the inclusion of ongoing DB provision for public servants. Whilst this continued provision is indeed good news for those who benefit, for the vast majority of workers DB pensions are a thing of the past. For the first time, this paper strips out the impact of public sector DB pensions and looks purely at what private sector workers can expect to get at retirement. And the story is a bleak one.

“In essence, private sector DB rights at retirement are currently close to their peak and will decline precipitously in the next 25 years, especially for men. By contrast, DC rights will grow only very slowly and will replace only a fraction of the loss in DB rights, leaving new retirees in years to come substantially worse off than their counterparts retiring today.”

It is lamentable not just for individuals but also for future economic prospects that there has been such a dramatic drop-off in private sector pension provision. And all the more so given the UK’s demographic challenges make it absolutely crucial that as many people as possible retire on a decent income in coming decades. The UK economy has been performing poorly for years, and was of course doing so ahead of the coronavirus pandemic amid crippling Tory austerity, but things would have been even worse had it not been for an older generation on decent pensions.

We should also remember these people worked hard for their pensions, amid all the “boomer” sniping and social media memes along those lines.

It is not the fault of the older generation that companies are not providing adequately for the retirement of their current workforce, of all ages. Intergenerational inequality challenges on pensions, which are huge, should be tackled by helping young people, not by vilifying those who worked hard and were fortunate enough to accrue their retirement income at a time when so many companies made proper provision.

Similarly, sniping over public sector workers, whether it is around their relatively greater job security amid the pandemic or their pension schemes, is also tiresome.

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These are people who work hard, often in crucial roles such as (but there are many more) health and social care and education. The likes of nurses, doctors and teachers often enter these professions because of a passion for the greater good, and work well above and beyond their contractual commitments. Public sector workers in general also have not had the opportunity over years and decades to make the kind of large bonuses seen in the likes of banking (with big payouts in this sector interrupted only briefly by the global financial crisis).

It is a good thing public sector workers still have decent pension provision, not only for them but for the broader economy.

The challenges of increasing pension provision, especially for smaller firms and those in sectors hit hardest by the coronavirus crisis, have been ramped up dramatically by the economic fall-out from the pandemic. However, many larger companies could easily make their pension schemes more generous, and for them the choice is between this and a greater profit margin. Some big companies, it should be noted, do provide defined contribution schemes which go far beyond the minimum contributions required by law. But many schemes are miserly. And we should not forget – in the context of all those final salary pension scheme deficits that were so sharply in focus in the early years of the millennium and were used to justify a move to money purchase arrangements for new members and/or future accruals – the ubiquity of past “pension holidays” taken by many large companies in terms of their contributions.

We are where we are, though. And in the years and decades ahead the focus on addressing the pensions crisis should be on ensuring adequate provision across the private as well as the public sector – or what might in these days of the banal political soundbite be called “levelling up”. Jealousy of public sector pensions and levelling down, sadly, look to be the focus of many as the timebomb ticks, and those “misery loves company” attitudes will need to change, not only for future pensioners but for the country’s long-term prosperity.