FOOL'S EYE VIEW
Making Company Pensions Safer

By Jane Mack (TMFJane)
May 27, 2003

Employers who offer a final salary scheme seem to be stampeding towards the exit door these days. Just last week the National Association of Pension Funds published research revealing that more than 40% of companies operating a final salary scheme had closed them to new members in the last twelve months.

It's not surprising really. This type of occupational pension is very expensive to run although they're attractive to staff because the risk is all on the employer to ensure that the funds grow as expected. If it doesn't look like there'll be enough money in the pot to finance pension commitments, it's the employer who has to top it up.

The pension fund is typically 'ring-fenced' from the company, which means that the fund is still there if the company goes bust but a company that's gone down the pan isn't going to be there to bail out a fund that hasn't got enough money to meet its future commitments.

Unfortunately, this is exactly what has happened to a number of small companies in recent years and it's come as a huge shock to those workers who have found that their company's pension fund simply doesn't have enough money to pay out when they retire. Those who have already retired come first in the pecking order for the pension fund money when a company goes bust and there's usually not enough left for those who have yet to stop work.

Workers at Allied Steel & Wire (ASW) in Cardiff faced just this problem last year when their once prosperous company ran into economic difficulties because of the decline in the steel industry. Most of them lost their jobs and many of them found that, in spite of working for the company for decades, their pension was not going to be nearly enough to live on. In some cases, they were looking at half of what they'd expected.

These troubles have led Frank Field, the widely respected chairman of the Pensions Reform Group and the former Minister for Welfare Reform, to introduce the Pensions (Winding Up) Bill which is due to get its second reading in the House of Commons on 20th June.

You can read the text of the Bill as it was introduced to Parliament last December but as Mr Field told the BBC earlier this year: "Why should all the pain be felt by non-pensioners?

To that end, his Bill has four main aims:

First, when any scheme is wound up, he wants the assets to be shared proportionately so that all members of the scheme get the same level of protection regardless of whether they have retired or not. The share-out should be based on contributory years to the scheme rather than pensioners having first right to the capital, even if they have paid in for fewer years than current workers.

Second, pension debts should be raised in the pecking order when it comes to the distribution of the general assets of a company that has gone bust. There may be other creditors waiting in the queue but the requirements of the company's pension fund should be given higher priority than they are now.

Third, in many cases, the fees charged by those dealing with schemes that are being wound up might be considered excessive. According to Mr Field up to 15% of some pension funds are disappearing into lawyers, actuaries and professional trustees' pockets during winding-up - something he describes as a scandal. The Pension Ombudsman would be given powers to curb excessive charges.

Finally, Mr Field wants some sort of insurance scheme to be set up so that any company scheme being wound up which falls below a set level of funding can be topped up. In this way, current pensioners would be protected. One way of financing this could involve using the orphan assets that insurance companies have – the vast amounts of money that have never been claimed by policy-holders and never will be because they've long since died.

It's an important Bill because it will affect anyone who is or ever has been part of a final salary pension scheme – just in case the scheme ever finds itself in the position of having to wind up.

Incidentally, victims of pension scheme wind-ups plan to stage a rally in London on Sunday, June 8. Those who would like to add their support should visit www.pensionstheft.org for further details.

More: Pensions Centre