Abandon this charade

For employees, the concept of the company pension is as outdated as a job for life.

by Patience Wheatcroft, business and City editor of The Times
Last Updated: 31 Aug 2010

There is an impending pensions crisis. Industry has long known about it, and been forced into costly attempts at avoiding action, and now even the most blinkered of politicians have woken up to it. At the party political conferences, the pensions issue cropped up almost as often as Iraq, and many of the delegates were clearly more interested in their own financial futures than the failure to find Saddam's weapons of mass destruction.

Some companies now face pension liabilities that are inflicting huge damage. Yet few seem to query whether it is sensible for businesses to involve themselves in this area. If they did, they'd conclude that making a success of business is sufficiently complicated for companies not to need the additional burden of running a pension scheme.

The concept of the company pension is as outdated as the idea of a job for life. Today, people change employer regularly, and may even enjoy a career change or two. For an employer to assume the long-term commitment of a pension promise to employees seems silly. Conventional wisdom maintains that a generous pension scheme is an aid to recruitment and building employee loyalty.

The prospect of a final salary-linked pension might influence some, particularly those nearing retirement, but pensions do not seem to be a major lure in securing younger staff. On the contrary, companies find that a significant proportion of their staff choose not to participate in the pension scheme, effectively shunning the extra cash that the employer is prepared to pay them by way of contributions.

This nonsensical behaviour explains the growing lobby for making staff opt out of corporate schemes. Employers' contributions to pension funds have doubled since 1997 and now run at £37 billion a year. If this money was generating a feel-good factor among staff, it might be considered an investment, but in today's uncertain financial climate the pension fund is just as likely to be a cause of discontent. With closing time being called on most final-salary schemes, employees' pensions are left to the mercy of the markets, which means the annual statement of valuation can be a depressing document.

The time has come for companies to step aside from the pensions business.

Instead, they should hand over the cash in the form of salary and leave it up to individuals to make proper provision for their retirement. Advocating a return to personal pensions may sound foolhardy, but the reason why the financial services industry ran into such difficulties over the idea when the Thatcher government embraced it was because people were duped into voluntarily giving up something valuable for something much less attractive.

There was a time when Marks & Spencer provided free hairdressing and chiropody for its staff. Not any more.

The contract between a modern worker and his or her employer is not based on benevolent paternalism, but a decent reward for work done. Perks still find their way into the equation, but because of taxation, the trend is moving towards cash rather than a car, lolly rather than luncheon vouchers.

The conflation of all benefits into the salary cheque should be extended to pensions.

The Government has insisted that at least a stakeholder scheme should be made available in companies of any size, but most of these are empty shells, set up to comply with the obligation but not marketed to staff and therefore not used. This charade should be abandoned. If people want to save cash, there are plenty of options available to them outside the workplace without adding to the burdens of employers.

That people should be saving more is not in dispute. The report from Adair Turner's Pensions Commission spelt out just how wide is the gap that needs to be bridged. How to find an extra £57 billion a year is a problem to tax any Chancellor, and Gordon Brown has indicated that he will not be pushed into doing anything about it before he is ready. Only platitudes will be heard on the subject until after the election.

But doing away with his complicated pension credits would be a step in the right direction. A means-testing system that penalises those who have prudently made some provision for their old age will not encourage saving.

Lifting the basic state pension and gradually phasing out the credit, as suggested by the Conservatives, seems sensible. They claim they could pay for the change by abandoning the New Deal, that expensive job-creation scheme devised by Brown.

The new pensions minister, Alan Johnson, has ruled out the obvious way of alleviating a pensions crisis - to delay the pensionable age. Yet it is inevitable that people will have to work for longer in order to fund their increasing life expectancy in retirement. We will need thriving businesses to employ them. Companies should be allowed to get on with creating the wealth on which our future pensions will depend without having to worry about the wellbeing of someone who left the company many years ago.

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