FOOL'S EYE VIEW
Radical Proposals For Company Pensions

By Stuart Watson (TMFTiger)
July 11, 2002

Hot on the heels of the Sandler Review on the UK investment industry today saw the release of the Pickering Report (pdf file) regarding company pension schemes. Like the Sandler Report, there is a lot of good points and common sense throughout.

The large number of company pension schemes shutting their doors to new members, and in some cases even closing them down completely, has dominated the headlines in the last year or so. Although certain regulatory changes have taken their toll, the key problem remains the escalating cost faced by companies as people's life expectancy increases. Whereas previously they only had to fund a pension for a few years it is now a few decades. Of course this did not happen overnight, but the issue has come to a head in recent months.

A company pension scheme can be thought of as an additional element of your salary. Due to the restraints placed on how the pension is provided, the amount of additional salary companies would need to pay will increase significantly over the next 20 or 30 years. Quite understandably, they've baulked at this prospect. As the report highlights a company pension is voluntarily offered by employers and it's not a divine right.

The Pickering Report has made several suggestions to tackle these restraints on pension schemes. This will make them cheaper to run in the hope that more companies will continue to offer them. Of course it will mean a lower pension value for many people but this is considered to be a lesser evil than the zero pension value that would be received if these schemes were to be withdrawn en masse. As Pickering says [his emphasis] "a careful balance needs to be struck here between giving employers the right to amend pensions in the light of changed circumstances and their responsibility to keep their pension promise".

Among the report's key suggestions are:

• Companies will be able (once again) to make joining the company pension scheme a condition of your employment;
• pension income will no longer have to increase in line with inflation;
• abolishing the requirement to provide benefits to survivors (i.e. spouses);
• immediate vesting of benefits once a scheme is joined -- this is intended to reflect the fact that our workforce is now more mobile;
• easier pension transfer rules;
• a more pro-active regulator; and
• simplification of pensions schemes in general by cutting red tape, including more targeted provision of information.

The second and third of these proposals are the most controversial and there is no denying that they will significantly reduce the value of pensions paid out under company schemes. But they could also be seen as bringing such schemes more in line with personal pensions where, although you can get these options, your initial pension is likely to be reduced as a result.

So what does this mean if you have a company pension scheme?

Whether these proposals will be adopted remains to be seen. Likewise, the extent to which they might affect existing pension plans is yet to be decided. Whether the changes are sufficiently large to reverse the trend of companies shutting down their plans is also unclear and, until the proposals are ratified, companies might prefer to be cautious, especially if the tough economic conditions continue.

Regardless of what changes are made, a company pension will still be one of the most cost-effective ways for us to generate an income for our retirement, courtesy of the hefty chunk of the contributions that are paid for by the employer. However, it doesn't mean that you can rely on it to produce 100% of what you'll need in your retirement. It remains your responsibility to work out if there will be any shortfall and to work out how to go about providing for it. This article describes one method of going about this.

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