The credit crunch threw some light on the parlous state of UK pensions, both private and public sector. Now the focus has shifted to what actuaries, finance directors, trustees and the government can actually do when the liabilities of a pension scheme begins pulling them under.
Days after the coalition government hammered out its plans for the future, a panel of pensions experts met various FDs at the London Stock Exchange to discuss ideas on where to go next.
Kevin Wesbroom, UK lead for global risk services at event sponsor Hewitt Associates, kicked off by saying the election had put pensions in the firing line as the government looks to plug the hole in the public coffers.
Wesbroom accused successive governments of dragging their feet on pensions, before flagging up sweeping, but potentially damaging, proposals, such as the abolition of compulsory retirement, floated by the new government. He also highlighted the incoming National Employment Savings Trust (Nest) measures.
“You, the employer, will put in three percent, the individual four percent and the government will put in one percent by way of tax relief,” says Wesbroom. “The New Employer Obligations auto-enrol people in pension plans. These have been watered down and will be phased in by 2018 – but this still needs to be thought about.”
His main concern rested on how pensions tax relief withdrawals had not been mentioned by the incoming government.
The coalition government is now looking at alternatives to the reductions, because it will bring significant complications.
The millstone of public sector pensions was also on Wesbroom’s agenda.
“The good news is that somebody has decided we should stop paying for public sector pensions,” he said. “There’s a big disparity if you look at the difference in terms of the quality of public sector pensions and the quality of private sector pensions. The private sector degraded their pensions massively over the past 10 years.”
Scrapping compulsory annuitisation, he thought, would also put FDs under pressure, a move later confirmed in the Budget.
“You won’t be able to sack your workforce when they reach retirement age, meaning the trend for these schemes to die out is set to continue,” he said.
Jackie Daldorph, managing principal at Hewitt Associates, pointed out that things were not much better for final salary schemes.
About 20 percent of those schemes have already closed, while 70 percent of finance people polled by Hewitt are more likely to consider doing that now.
“FDs in the audience have a legitimate right to do the same thing – as long as it is for the right reason,” she said.
Michael Johnson, former secretary to the Conservatives’ economic competitiveness policy group who joined the panel, said the Nest changes were “fundamentally flawed and will see FDs at greater pains to make ends meet”. Most people who save in Nest will get “derisory pensions”, he said.
Johnson also echoed Wesbroom’s concerns about the burden of public sector pensions on the rest of the business community. Five years ago the gap between employee contributions and pensions in payment was £200m.
“In 2010, it is expected to be 24 times that, or £4.8bn,” Johnson said. “That is plugged automatically by the Treasury. What was a self-contained system within the public sector has broken down.
“Of more concern is that the public sector will contract at the same time as the number of pensioners rises. This means a reduction in contributions and an increase in outgoings.”
But cutting back public sector pensions will create its own problems, according to public finance accountants. In 2008-09, public servants contributed more than £8bn to their pension schemes, a sum which was effectively used to pay the pensions of today’s public sector pensioners.
Johnson called for pensioners’ asset pots to be transferred to beneficiaries without any inheritance tax, which would encourage people to start paying into a pension.
“We need to start tiptoeing away from what is essentially an unfunded public sector pensions world to a funded one,” he said. “That will take 50 or 60 years, but we need to make a start.”
Read the Chancellor’s decisions on pensions here
Brexit poses strategic challenges at several levels of the organisation. At the corporate level, key questions might include whether to relocate headquarters, restructure for tax or capital purposes, acquire within or diversify away from the UK
The idea of CFO as crisis manager has never been more necessary than now.
The nation's newspapers give their verdict on the result of the EU referendum
Administrators Duff & Phelps confirmed that although multiple offers for BHS were received, attempts at a rescue deal collapsed