Employers must honour their pension obligations

'Company directors are kicking their loyal, older, more vulnerable staff in the teeth'

Some middle-aged people are suddenly learning that the pension for which they have been putting money aside may be worth much less than expected. They are working for companies such as the food retailing group Iceland or the accountants Ernst & Young. They are in their late forties or early fifties. They have been members of the firm's pension scheme and, depending upon how long they have been contributing to it, they had been expecting to receive on retiring an income equivalent to as much as two-thirds of their final salary. Except that Iceland and Ernst & Young and others like them are closing their existing schemes not only to new members, but to future contributions from existing members. Workers will have to make their own arrangements from now on.

In strict theory, this needn't matter. Staff can arrange pension schemes by dealing directly with a financial institution. What they will find, however, is that the size of the eventual pension will now vary according to the skill with which their funds have been managed and the performance of stockmarkets. Seeing how badly share values have behaved during the past two years, they will be none too optimistic.

One can pile on the agony a bit more. Often when companies close their pension schemes, they take the opportunity to reduce their own contribution. Employers on average have been adding sums to the staff pension fund equivalent to about 15 to 20 per cent of salary. But when employees are required to make private arrangements, the employers' contribution has been averaging much less, usually between 6 and 11 per cent.

The cumulative effect, then, is of the double whammy variety. First the employee loses the guarantee that his or her pension will be a fixed proportion of final salary regardless of the performance of the stockmarket. And second, the employee often has to make good the reduction in the employer's contribution when making his or her new arrangements.

Companies are declining to provide pensions themselves because they can no longer afford the guarantee. Iceland, for instance, found that it had to pay £78m into a scheme valued at just over £500m to make good a shortfall that had appeared. Nationwide explained the problem in a different way. To maintain benefits at their promised level, it would have had to raise its contribution from 12.6 per cent of salaries to 19 per cent.

The need for these top-ups has arisen partly because pensioners are living longer. The rise in life expectancy, welcome as it is, does bring with it financial costs of various kinds, and pensions provisions are one of them. A further factor has been the declining returns from stockmarket investment. And this development in turn relates to a broader phenomenon, the coming of a deflationary era.

Technically, deflation means falling prices, and among the advanced economies, only Japan is undergoing that experience. Prices are rising in Britain by around 2.5 per cent per annum. Yet this low level of inflation feels and acts like deflation itself, for it means that suppliers of goods and services can no longer pass on large cost increases to their customers, whether they be jumps in raw material prices, or lavish staffing levels, or the cost of guaranteeing a company pension scheme.

To explain, though, is not necessarily to be sympathetic to those companies that are backing out of providing a good pension for long-serving staff. Let us go back to the middle-aged employees who are most vulnerable. They will have started their jobs when it was compulsory to join the staff pension scheme. It was a condition of employment. Even if they had wanted to, young employees weren't able to make private arrangements; the notion of private pension arrangements, portable from one employer to another, didn't exist at that time. Thus having long ago been dragooned into a staff scheme now, 20 to 30 years later, they find that they are being marched out of it.

How should boards of directors act when they find that their staff pension scheme has become too expensive? The first step, which many companies have taken, is to close their scheme to new entrants. This means that from now on, anybody joining the company must make private provision. That is fair enough. Long serving staff can still look forward to the pension benefits they were always promised.

It is the second step, the measures taken by companies such as Iceland, which are extraordinarily harsh. Directors should understand the enormity of what they are doing. They are kicking their loyal, older, more vulnerable staff in the teeth. Let them at the same time also dismantle their own generous pension arrangements. Is Iceland really going to continue to pay sums equivalent to 25 per cent of directors' salaries into their pension arrangements? If so, that stinks.

aws@globalnet.co.uk