Private sector pensions

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

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