Pensions: a disaster waiting to happen

WHEN Labour came to power five years ago it promised to think the unthinkable on pensions. Poverty in old age would become a thing of the past. Chancellor Gordon Brown promised new tax incentives and savings schemes designed so that even the poorest in the community would have a chance to set money aside for a decent old age. A new Government-backed scheme - Social Security Minister Alistair Darling's stakeholder pension - would provide a low-cost alternative to the expensive packages offered by City investment houses.

Well, the Government was right on one thing - the unthinkable is now happening. But it has been disastrously wrong on everything else. Far from creating a pensions wonderland, it is presiding over a pensions quicksand. No one is interested in stakeholder pensions, but worse, far worse, the foundations of the good stuff Labour inherited are also beginning to crumble.

When it came to power, British pensions were seen as enviably sound, but just not widely enough available. Not any more. The sum total of Labour's tinkering is to make the problem more acute by the day. People who thought they had been prudent and made provision now need to think again. Not since Victorian times has there been such a threat of widespread destitution for our children when they reach retirement.

A disaster of epic proportions is in the making because companies are pulling the plug on final-salary pension schemes, claiming they can no longer afford them. These plans are the bedrock of the occupational pension system, promising employees a proportion - normally a half - of their final salary at retirement. But in the past few years, the costs of running such schemes have exploded skywards, causing major companies like Marks & Spencer, BT, Whitbread, ICI, Lloyds TSB, Sainsbury's and last week Abbey National, with a record of paternalistic philanthropy towards their employees, to pull down the shutters.

Number of schemes plunged

ACROSS the country, in just seven years, according to Scottish Equitable's Stewart Ritchie, the number of companies with final-salary schemes has plunged from 38,000 to just 10,000, leaving employees to take their chances with a direct-contribution pension. As Equitable Life amply demonstrated, there is absolutely no certainty of how much it will be worth - if, indeed, it will be worth anything - on retirement.

It's not just the volatile stock market that poses a threat. Most companies pay much less under direct contribution than they pay into final-salary schemes, so the employee has a lot less money working for him. But because people live longer, far from saving less, they should be saving more. Actuaries say 30-year-olds should save about three times as much as their parents had to for the same pension. If they fall behind now, the chances are they will never catch up. When they turn 65, the money simply will not be there.

So why, after nearly 50 years of boasting about them and encouraging employees to join, have companies suddenly decided they can no longer afford such pension schemes? They cite many reasons - low interest rates, poor stock market returns, a big increase in life expectancy, a damaging change in how pensions costs have to be recorded in company accounts - but there is one which stands out above all the others. The blame is put firmly at the door of Chancellor Gordon Brown and his 'stealth tax' on pension fund dividends.

In his first Budget in July 1997, Brown increased significantly the tax pension funds have to pay on their income. Previously, the funds had been a relatively safe haven from the taxman, because politicians understood that the more dividend money they were left with, the more they would have to reinvest in more shares for their members and the bigger the pension pot would grow, and the less likely they would be to become a burden on the state. Simple really.

Vicious circle of decline

BUT the Brown tax raid has put the process into reverse. By draining money out of pension funds, he has ensured that they have less money to invest. Share prices then begin to fall, which makes the funds smaller still, and the entire industry goes into a vicious circle of decline. Across the industry, in the past couple of years, the total value of UK pension funds has fallen by more than £100bn, some 10% of their value.

Brown was warned that what he thought of as a clever move had the potential fatally to undermine the health of pension funds. No one took much notice. The Opposition failed to understand the issue and because we were about to have the dotcom boom, with huge jumps in share prices, it made no immediate difference to pension fund members. Now, the funds get weaker, and the financial strain on the sponsoring companies gets greater.

The real casualties in this are not people like Gordon Brown, in his fifties, or even workers in their forties, but those young people - 30 or under - who traditionally have paid no attention to the debate, as they live life in the certain belief they will never grow old.

Actuaries do not always get their sums right, but they do better than most. And when they say young people need to save roughly a third of their income every year of their working lives to match their parents' pensions, they are probably close to the mark.

It is, of course, an impossible task. No one outside the City high-fliers can possibly save that much and have a mortgage, a family and a half-decent home life. The professional pension providers know this, the actuaries know this, and the Government knows this. But they won't admit it.

The myth of adequate pensions for the current younger generation is the biggest lie of the decade. It is time the Chancellor admitted his tax policy was a mistake and took urgent action to put it right.