John Humphrys: Pensions – Should the Government Tweak the Rules?

May 27, 2016, 1:35 PM GMT+0

In an urgent attempt to save the jobs of Britain's steelworkers, the government is proposing to change the terms of their pension deal in order to make the company that employs them more attractive to potential new owners.

But the move, small enough in itself, is causing alarm to those who fear it could set a precedent undermining people's confidence that they will receive in retirement the pension to which they think they are entitled.

How serious is this threat? But, more fundamentally, how much has the prospect of a secure pension income in old age itself become a mirage?

The government's proposal is a last-minute attempt to save the jobs of 10,000 steel workers employed by the giant Indian industrial conglomerate, Tata. Back in March Tata announced that it wanted to sell up what was once the nationalised company, British Steel, because it was losing a million pounds a day. The clear implication was that if it couldn't find a buyer the firm would simply be wound up, throwing all its employees out of work.

Since then the government has been working with Tata to find a solution that would keep the steelworkers in their jobs. Central to the problem of selling the firm has been the albatross of the company’s pension fund. The old British Steel Pension Scheme has around 130,000 members, requiring a fund of £15bn to service but which is £485m in deficit. Potential new owners of the company look askance at the burden they would be taking on.

So the government has come up with a plan to reduce the size of this burden. It is proposing what appears to be a minor tweak to the rules under which the scheme works that could nonetheless reduce the burden by about £2.5bn.

The tweak involves changing the terms on which pension payments within the scheme are upgraded every year. Currently, and by law, they must increase in line with the retail price index (RPI). The government is suggesting that in future they could be raised only in line with the consumer prices index (CPI) which is usually a lower rate than the RPI.

The effect of this would be that steelworkers’ pensions would be worth less in future than they expected but it seems the unions are prepared to pay this price in order to try to secure their jobs. They also reckon that the deal would secure better pensions for their members than if the company went to the wall and the pension scheme had to be bailed out by the government-established Pension Protection Fund, which would see pensions cut by around 10%.

But it is the implication for other people's company pension schemes that is worrying critics of the plan. Steve Webb was the Liberal Democrat pensions minister in the coalition government and has long been an expert on the issue. He said: 'The government is going down a very dangerous path. … Rushed changes to pension rules risk driving a coach and horses through the pension security of hundreds of thousands of workers well beyond the steel industry.'

The point here is that the government would have to change the law in general terms in order to make the specific change for the steel pension fund. Its draft proposal suggests the new law would insist that the shift from the RPI to the CPI could be made by a company pension scheme only in an 'emergency', but critics say that that is too loosely defined and that companies could create emergencies in order to save money. Mr Webb said: 'Once there’s a loophole that says you can walk away from promises you've made, other [companies] could walk away.'

The British Steel Pension Fund and the others Mr Webb fears could be affected by the change are forms of company pension called defined benefit schemes. Both employers and employees contribute to them but, as the name suggests, the actual pension that is ultimately paid out is defined in specific cash terms, with upgrades paid annually.

But companies have faced increasing problems with these schemes. Pensioners have tended to live longer than actuaries calculated, meaning that the schemes have had to pay more out in pensions than they expected. Furthermore, the schemes have found themselves living in a long period of unexpectedly low interest rates. This has meant that they have been earning less on their assets than they expected while having to pay out more. This explains the enormous deficits all such schemes have built up.

As a result many companies have been closing their defined benefit schemes to new members, offering younger workers instead a much less generous option, called a defined contribution scheme. In this sort of pension, both the employer and the employee continue to contribute to the pension pot but on retirement, instead of receiving a defined cash pension for the rest of their lives, the retired worker gets given the pot itself, which he or she has to invest in a private personal pension scheme. These pay out much less generous pensions. But the company is off the hook.

As more companies move from defined benefit to defined contribution schemes it could be argued that the problem that concerns Mr Webb will affect a decreasing number of people. But that fact highlights an altogether more alarming aspect of our whole pensions scene, which is the declining incidence of a secure pension in old age altogether.

For many younger people company pension schemes even of the defined contribution sort may be unavailable. As fewer people attach themselves to a company for life but move around as freelancers or work as self-employed, more have to make their own provision for their pensions.

But for many young people this hardly seems a priority. For many, their first priority is to pay off student debt. They also have to find money to pay rents that are, on average, taking far more of their post-tax income than used to be the case. If they can jump these hurdles and still save to put down a deposit on a property of their own, they will find themselves borrowing far more than their parents ever had to in order to get a mortgage.

In all this, thought of providing for a pension comes last. In any case, many young people may think it’s not worth the bother as they reckon they're going to have to work into their seventies even to get a state pension, never mind thinking about a personal one. The very idea of a secure private pension, whether upgraded by the RPI or the CPI, must seem a complete fantasy to many younger people.

The chief economist at the Bank of England, Andy Haldane, admitted the other day that he simply didn't understand pensions. He’s certainly not alone.

The question for now, though, is whether the tweaks in the law the government is proposing in order to try and save steelworkers jobs is justified in itself or whether it really is a dangerous precedent that could undermine what little security there is left in our pensions system.

What’s your view of the wisdom of the planned change? And what do you think more generally of the pension scene?

  • Do you think people should be able to look forward to secure pensions in addition the state pension after a long working life?
  • Do you think it is realistic for younger people to want what their parents’ generation took for granted?
  • And what change would you most like to see in the way we run our pension system?

Let us know what you think.