We fiddle as pensions are washed away

As the Government moves to protect final salary schemes, critics tell Melanie Bien that it's 'tinkering at the edges' of a crisis

After months of deliberation following the release of its Green Paper, the Government last week revealed how it intends to tackle the pensions crisis. But, for many industry insiders, its planned reforms didn't come anywhere close to addressing the fundamental issue that we are not saving enough for retirement.

Even though just one in five of the working population belong to them, final salary pension schemes were the focus of last week's announcement from Andrew Smith, the Secretary of State for Work and Pensions. What he said, was welcome: the Government intends to introduce compulsory insurance, the Pension Protection Fund (PPF), to safeguard members of final salary schemes in the event of their employer going bust. But what about the millions who have no pension provision at all? Is this going to encourage them to save for retirement?

"If the Government thinks that the action it has proposed solves the pension problem, it either doesn't understand what the crisis is or it lacks the political courage to deal with it," says Sheila McKechnie, director of the Consumers' Association. "Many changes apply only to current employer schemes. The simple issue that we aren't saving enough is being sidestepped.

"The Government has completely bottled out of facing up to the problems in the private pensions sector, which it expects current generations to rely on to fund their retirement."

Rodney Bickerstaffe, president of the National Pensioners Convention, Britain's biggest pensioner organisation, agrees: "The announcement merely tinkers at the edges of the pensions crisis. Half of all final salary company schemes have closed, and private pensions have been hit by corruption, scandals and the falling stock market. Yet still the Government refuses to acknowledge that the answer lies in providing a really good state pension that people can live on."

While the proposed PPF will offer some protection, it is not without problems. Because the basis of the insurance fund is that all companies offering final salary schemes pay premiums into a central pot, the contributors will be paying for the minimum pension guaranteed to members of failed schemes. As yet, no details of the likely premiums have been released, and the Government is also refusing to make up any shortfalls under the PPF.

In all probability, meanwhile, the fund could provide another excuse for employers to close their final salary schemes or to operate a riskier investment policy safe in the knowledge that, if the firm fails, pension fund members will be bailed out by the other companies paying into the PPF. There is evidence of this happening in the United States.

"[These reforms] could herald the final nail in the coffin for defined benefit pension schemes," warns Mike Fosberry, head of pensions at Smith & Williamson, the professional and financial services group. "Companies with these schemes will be looking very closely at their options now, bearing in mind that it will be more expensive to wind them up in the future. If they are looking to reduce liabilities, options such as closing schemes to new members will be on the agenda."

There is also the question of how foolproof the insurance will be, as liabilities could be considerable. An equivalent system, the Pension Benefit Guaranty Corporation, has run in the US for the past 30 years. In the financial year to September 2002, it suffered a loss of $11.3bn.

David Willetts, shadow Secretary of State for Work and Pensions, adds that the Government has looked at insurance for pension schemes in the past but ruled it out as imposing an unacceptable burden on employers. He questions why ministers have suddenly changed their minds and how they can guarantee that their plans will work in practice.

"Final salary pension schemes are already facing deficits of billions of pounds," warns Martin Smith, chief executive of Close Wealth Management. "Indeed, FTSE 100 companies have a combined occupational pension deficit of up to £85bn, and taking out insurance will not make this disappear."

Mr Smith also points out that the introduction of the PPF is little consolation to the 40,000 people whose pensions have already been slashed as a result of their employers folding. "For many, the horse has already bolted, but restoring confidence in pensions for employees is vital."

Most pension commentators agree more needs to be done to encourage us to save for retirement. And those incentives to save can only come from the Government. But Labour's response to the Green Paper does not address these issues.

Nick Breton, pensions expert at independent financial adviser The MarketPlace at Bradford & Bingley, raises a final issue: "If the Government is serious about encouraging savings towards retirement, it should consider reviewing its policy on removing tax relief on dividends paid to pension funds - a move that currently saves the Treasury £5bn a year."