Pensions crisis


An in-depth look at the pensions crisis currently hitting the UK, affecting pensions of both public and private sector workers.

Submitted by Steven. on October 12, 2006

What's the issue?
Pensions across both the public and private sectors are under attack, with increasingly strong measures being taken to try and reduce the amount paid to workers on retirement, and increase the amount of time spent at work before retirement is an option.

Who's affected?
Everybody. Although older workers, particularly those thrown out of work during the de-industrialisation of the country are most at risk, younger workers will be those most hurt as they grow older by regulations and changes to pension provision currently being implemented.

And how?
The means and methods of the attacks vary across the public and private sector (see below) but range from straightforward attempts to change the agreed contracts of workers to force them to accept cuts to their pensions, the time at which they can collect and the amount they have to pay in first to direct taking of money from schemes and abandonment of pension funds by companies.


Private sector pensions


Factsheet about the issues around pensions for workers of private sector companies.

Submitted by Steven. on October 12, 2006

Private sector pension schemes are usually run in larger companies, such as those in the FTSE 100 of Britain’s richest corporations.

Although systems vary, a common factor is the existence of a pension ‘pot’ the workforce pay a percentage of their wages into, which is then matched by the company. The pot theoretically acts as working capital to both pay back to the workforce when they retire, and while it remains in the coffers, as investment money to play the stock exchange.

Problems have risen over the last decade to turn this fairly straightforward deal into a battleground between workers and bosses. Companies claim that the pension deal did not take into account rising standards of living, and increased lifespans on the part of the workforce.

Companies have however been largely responsible for the mess, having notoriously taken ‘pensions holidays’ at the behest of Gordon Brown at the height of the stock market boom. When the market crashed, it is thought that some £30bn was wiped off the value of the various pension funds, plunging the sector into crisis.

Company bosses have also been a major factor in destroying the stability of pension funds outside this context. Pension funds are usually administrated by appointed company board members, who in many cases have pursued a high-risk investment strategy (for example, pension funds were heavily involved in technology companies during the dot com crash).

Combined in many cases with saturated market places requiring attacks on workers’ living standards to increase profit margins, and with tycoons such as Phillip Green taking all profits out of their companies as dividends rather than replace the money, this has led to a raft of measures brought in to reduce pension liabilities by taking cash from workers’ pockets.

One widespread initiative has seen companies close pension schemes to new members, while others have spun their pension schemes off entirely from the main company, clearing immediate debts in order to release themselves from further responsibility to keep the schemes running.

Some companies are raising the age of retirement, while most have attempted to switch over from schemes promising ‘final salary’ pensions, which base pension payments on the wage workers retire at, to working life schemes averaging out workers’ wages throughout their employment at the company. Inflation (and factors such as promotion, low starting points etc) mean that the second option always pays out significantly less.

Further problems have been caused by the de-industrialisation process. As the major industries shut down, contributions to pension pots ceased and schemes quickly went bankrupt. This has left a huge swathe of the manufacturing sector workforce facing, not the comfortable retirement they had planned and paid for, but destitution.

In 1987, progressive figures in the EU, who had foreseen the damage such bankruptcies in European manufacture would do to the long-term prospects of hundreds of thousands of people, passed a resolution stating that protection funds be set up by countries like the UK, to provide relief for funds stripped of company support in this manner.

Britain did not set up its own Pension Protection Fund(PPF) until 2004, leaving, according to Amicus, around 65,000 people without support as their employers went under.

The PPF currently requires companies to pay money into a central store (the payments required add up to around £300m a year at present), which is then used, effectively, as an insurance scheme in case companies are unable to meet their pension obligations.

The scheme is not retroactive, and thus does not cover the costs of de-industrialisation.

The CBI have complained that the amount being paid is too high, and that other means must be found to reduce the pension deficit, primarily more attacks on the pension payouts themselves.

Rob Ray
Last reviewed/edited by October 2006


Public sector pensions


Factsheet about the issues around pensions for workers of public sector organisations.

Submitted by Steven. on October 12, 2006

A very different animal from private sector pensions, the public sector pension was set up to be effective immediately, and thus did not work on a pension pot principle.

Instead, public pensions, covering all civil servants (approx 1/3 of the working population), are paid directly to the government throughout the working life of the individual. Pensions are then paid back out of existing governmental funds.

In recent years, the government claims the balance of people paying into and out of the pension pot has changed, as people are living longer.

The government have as a result begun to attack retirement ages for public sector workers, proposing that the ’85 rule’ allowing workers to retire after their service and age add up to 85 or more, be scrapped, and that workers only be entitled to their full pensions at the age of 65 (it is currently 60).

The Turner Report, which had proposed the changes, also recommended the gradual raising of pensionable age to 70 if these proposals were accepted.

The proposals directly contravened the accepted standards, and threatened to con millions out of money they had already paid into the pension pot.

Last year, the major public service unions, including the PCS, Unison, Amicus and the T&G vowed to fight the move. A general strike was balloted for close to the May elections, but a halt was called thanks to Labour lobbying of the top ranks of the union and a promise that the party would back down if it was left until after the election.

After the election, the government resumed its plans. The unions against threatened action and at the end of last year a deal was struck, with the government cutting up the pensions issue into national and local level services.

Local level services were left out negotiations, and unions were told that any negotiations would have to be with local government employers on pensions in that area.

National level negotiations, though presented as a victory for the unions, gained everything that the government wanted, albeit over a longer timeframe. Although existing government workers’ pensions are protected, all new workers will be subject to changes in the conditions of their pensions meaning later retirement.

This effectively ended the threat of official union action, and meant that over the course of the next 50 years the government would replace the more reasonable deal currently in effect with one involving a five year increase in working life.

Research has shown that many workers in the poorest-paid and most hazardous sectors will under this plan be dead before they can enjoy their pension. The estimated average loss per worker of the move is £20,000.

In local government, negotiation is still going on as this is being written, but the same deal has effectively been struck. Local governments are trying to get support staff exempted from the deal, including support teachers reservist firemen etc.

Strong incentives are being considered to try and shift emphasis from the public sector’s dependence and increasingly coordinated concern over governmental pensions into a state-sanctioned ‘second pension’.

Financial company Watson Wyatt have estimated the government’s total pensions liabilities (calculated as if it were a company) at £1 trillion, saying that the situation is effectively a growing crisis requiring drastic measures.

Critics of this system of accounting however have pointed out that as the government takes and pays pensions contributions directly, the trends looked at should not be liabilities but amounts paid in and out, which have not changed in the last year.

Rob Ray
Last reviewed/edited by October 2006