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 Posted: Sun Nov 13, 2005 1:20 am Post subject: Is there a pensions crisis ? |
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It keep cropping up from time to time ?
Is it true or is it mostly media hype, and if there is one exactly whats the problem ? |
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Mrschips
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| Posted: Sun Nov 13, 2005 1:22 am Post subject: |
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The "crisis" (although I think that is a bit of a Daily Mail exaggeration) is that if things stay as they are, most future pensioners aren't going to have much money to live on. Pensioners traditionally rely on a combination of the State pension scheme and company pension schemes to pay them in retirement. However both of these are starting to feel the strain for a number of reasons, including...
1) Increasing longevity - pension funds have to be bigger because they need to pay pensioners for longer.
2) Bad investment market returns in the early part of the decade - most company pension schemes had a lot of their money invested in the stock market which lost over half it's value between January 2000 and March 2003. It has recovered about half the ground since then, but is still way off where it "should be".
3) Falling expectations of future interest rates and investment returns - more money needs to go into pension funds now to pay for future pensions as the investment return it will generate in the future is forecast to be lower than it has been historically.
4) Higher taxes on pension funds - in 1997 the chancellor increased the tax that pension funds have to pay on dividends they receive from the shares they hold.
5) Increased regulation of pension funds following a few scandals/c0ck ups. There is far more red tape for companies to wade through if they want to run a defined benefit pension scheme now which many find offputting (although this is not necessarily all bad if it stops schemes being woefully underfunded).
6) Population demographics - if the current trends of birth and death rates continue, then a few decades down the line, the ratio of over 60s to under 60s will be far higher than it is now. There will be far fewer tax payers to pay for the State pensions of the over 60s.
7) The increasing trend of company schemes changing from defined benefit style to defined contribution. The latter usually have lower contributions going in as it is the members themselves that have to chose to sacrifice their pay to make higher contributions whereas DB schemes usually have fixed employee conts and (much) larger variable top up employer contributions.
The crisis can be broken down into a crisis for the State scheme and a crisis for the company schemes. The State scheme is "pay-as-you-go" which means that todays pensioners are paid by the taxes of the current taxpayers. Therefore this is only really affected by problems 1 and 6 above. Still, unless more pensioners start dying or more children start being born, the current system is unsustainable so the age at which pensions start being paid will have to increase or the state pension will have to decrease in real terms (or both).
The company crisis is a bit more complicated so here is a bit of background (you say you haven't started work yet so I will assume you know nothing about company pensions - I didn't before I started work anyway!)
Traditionally, companies would fund a defined benefit (also known as "DB" or "final salary") pension for their employees. This would give them a predictable pension at retirement which was proportional to the salary at retirement and their length of service (typically pension = service x final salary / 60 ). To fund these predictable pensions costs about 20-25% of salary for each member every year. In the golden days of high stock market returns, companies could get away with paying in a lot less than this (or nothing) because the investment returns they got on the Scheme money was more than enough to cover the contributions needed. However when the stock market wasn't doing so well, companies suddenly realised they couldn't afford to pay the full contributions necessary and many closed their DB funds to new employees. Instead they opened Defined Contribution ("DC") Schemes. These work on the basis of you and/or your employer putting money in each month, investing in shares/bonds and seeing what you have accumulated when you retire. You then pay this to an insurance company who will exchange it for a pension for life.
These are generally seen as not as good as the DB schemes, chiefly because of the unpreditability - if the shares you invest in do badly, you will not have much money to buy a pension with. However, they are also substandard because employers are being far less generous with them. In most companies these days, there are DB Schemes for the members who joined before they were closed and DC Schemes for those who joined later. The company will in all liklihood be paying 20-25% of salary into the DB member's fund, but only 5-10% (if that) into the DC members fund. You don't have to be Einstein to realise that DC members should expect a much smaller pension (unless they make up the difference themselves). Most employees don't realise this, and the fact that they are effectively being paid 15% less than an equivalent colleague who happened to join a few years before them.
However the one big advantage of DC schemes over DB schemes is that if the employer goes bust at a time when there isn't enough money in the pension fund, then the members of the fund can lose some/all of their promised pension. There have been a few high profile examples of this recently which has helped fan the flames of the "crisis". At least with a DC scheme, the money is all technically under your control.
However most people with DC schemes simply aren't putting enough money in so they will be in for a nasty shock when they come to retirement age.
A recent report said that the solution to the "crisis" was threefold. People should save more money in their pension fund, retire later and expect a lower pension. I have to say I agree. It is unreasonable to expect to work for 40 years, and live on a (good) pension for another 30.
I wouldn't start worrying yet if I were you  But I would try and take advantage of whatever company pension scheme you get. This is normally the most efficient form of pension provision for you, especially if your employer will make generous contribitions. The earlier you start, the cheaper it is to fund a good pension. |
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cardjunkie
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| Posted: Wed Nov 16, 2005 8:19 pm Post subject: |
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Thanks Mrs Chips 
I hear a lot about the pensions black hole in the public sector that is paid from tax reciepts rather than out of a fund, since they don't have a fund, so I guess that IS a pensions crisis !
Future tax payers will have to pay to cover the £700 billion hole. |
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Wade
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| Posted: Sat May 13, 2006 12:12 am Post subject: |
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The whole in public sector pensions is still there and still growing !
But the private sector has been busy riducing the deficits. if that was not bad enough, theres also a new problem just cropped up ! -
Government departments have begun an urgent investigation to uncover the full scale of billions of pounds worth of pension liabilities of privatised utilities underwritten by the state in the 1980s and 1990s.
Ten days ago BT disclosed that the former state-owned utility had a "Crown guarantee" on its pension fund, which meant that more than half of its £4.8bn pension deficit would be paid by the taxpayer if the company ever went bust. It is using the guarantee to argue that it should pay a reduced levy into the Government's new Pension Protection Fund.
Click to enlarge
Officials last week admitted that there was no centrally held list of the guarantees that had been made. The Pension Protection Fund said it was aware of up to 20 schemes that have Crown guarantees, although it would not name them. However, officials have admitted that this figure could rise as it speaks to pension trustees over the coming weeks.
The Sunday Telegraph has found 11 schemes in addition to BT whose trustees say they do have these agreements. These include six for rail workers, two for former employees of British Coal and one for employees of what was the Atomic Energy Authority.
The Department for Transport's accounts also suggest there are similar guarantees for two other former state organisations, the National Freight Company and the General Lighthouse Authorities.
Rolls-Royce, the aero-engine giant that was nationalised for several years after it in effect went bust in the 1970s, has one of the biggest pension deficits of any FTSE100 company. It refused to disclose whether its fund has a Crown guarantee. According to its last accounts, Rolls-Royce has a pension deficit of nearly £1.3bn. However, it has recently poured £500m into the scheme.
Some of the schemes with Crown guarantees have vast liabilities. For instance, the two coal schemes have 400,000 members and must pay out pensions with a combined value of £23bn. These two funds are reported to be well-funded. However, Pensions Management, the company that manages the old British Rail funds, refused to disclose the funding level of these schemes, which have a membership of more than 170,000 people. "Some are in surplus, others are in deficit," it said.
It is unclear how Crown guarantees would work in practice as many of them are simply a few lines in an Act of Parliament or based on promises given by ex--ministers.
The Treasury - which already faces an estimated liability of £700bn for public sector schemes - is distancing itself from the situation. It said it was up to individual departments to ensure that any liabilities were appropriately disclosed in their annual accounts.
"Just because an organisation says it has a Crown guarantee does not mean it has," it said. "We shall carefully assess the validity of any claims." It added that all Crown guarantees were made before 1997 by Conservative governments.
One trustee of a pension fund that has a Crown guarantee expressed little surprise that the Government did not know the full extent of these liabilities. "Most of the Crown guarantees are found in the earlier privatisations or when the members of the scheme had more muscle: either because there were more of them or because the government of the day was trying to rush through the legislation.
"By the end of the 1980s civil servants had got better at negotiating and managed to arrange privatisations without giving such guarantees." |
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Dave
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| Posted: Mon May 15, 2006 5:46 pm Post subject: |
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| As far as I can see the pensions crisis is mostly a public sector problem, since they do not have a pension fund rather that the pensions are paid out of current taxation ! |
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birdie
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| Posted: Wed May 17, 2006 3:26 pm Post subject: |
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Gorden Brown is a walking catastrophy. He has bloated the public sector, caved into the public service sector unions on their outrageous demands for early retirement, raided our pension funds. No wonder he now claims we can not afford penions we need and deserve. The beauty of the pension credits is that it gives him the choice which groups qualify for the top up.
Do we really want this person in any government job? I certainly do not!!
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