Pension
Policy Moving in Wrong Direction – FT Letter

by Dr. Ros Altmann

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Sir

The
confusion about pension issues continues. Your leader ‘Pensioning
off Company Schemes’ (Aug 11) and Nicolas Higgins’ reply
(Aug 13) fail to tackle the big picture. Private sector pensions
have become too expensive, because pensions were never designed
to last so long. As individuals start work later, expect to retire
earlier, live much longer, and interest rates fall, the cost of
old age support has soared.

It
is inevitable that final salary promises will have to change and
the sooner scheme members are warned about the reality, the better.
To claim that insurance protection of pension rights is too burdensome
is missing the point completely. If companies cannot afford insurance,
how can they afford the pension promises? If they cannot afford
the pension promises, why are they making them – and who is explaining
this to members?

Ultimately,
of course, it has to be the taxpayer that picks up the pieces. Either
this will be by underwriting private sector schemes or by paying
higher State pensions. The rest of Europe is forecasting huge rises
in Government expenditure on pensions, due to the ageing population.
However, the UK Treasury expects that our pension spending will
remain around 5-6% of GDP for the next 40 years. This is politically
impossible, given the decline in occupational and private contributions
which is occurring. The sooner we wake up to reality the better.

The
fact is that the UK pension system must change, or we are heading
for much more poverty and lower growth. The ‘pensions crisis’
which has so far been denied by Government, will have to be addressed
soon. The bottom line is that Government policy is relying on occupational
and private pensions to finance a 40% rise in pensioner numbers,
whereas companies and individuals simply cannot afford this. Our
final salary schemes are buckling under the weight of legal, regulatory,
demographic and asset price changes which have been thrust upon
them in past years. Surpluses, which should have been left to build
up to pay pensions in young funded schemes, were raided by Governments
and employers. Scheme members have been promised generous pensions,
official safety nets were put in place to protect pension rights
(MFR, regulators, trustees) but most companies can no longer afford
the promises they have made and the safety nets are full of holes.
Pension costs have escalated way beyond those originally envisaged
by employers. As schemes have become mature and market moves have
exposed the folly of over-reliance on equities, all parties must
wake up to the enormity of the problem. Shareholders are starting
to focus on these open-ended liabilities. Average job tenure is
around 5 years, but pensions often now need to be paid for 30 years.
When these schemes started, the numbers were the other way round!

Officials
seem to be driving pension policy forward, by looking in the rear
view mirror. We must change with the times. Until we reform the
State pension system, incentivise pension contributions properly
and encourage gradual retirement, we will not make any headway.
Clear vision is long overdue.

Yours

Dr. Ros Altmann
Governor, London School of Economics