Pensions World

The destruction of the nation’s private pension system is the biggest single indictment of this government argues Anthony Hilton, Evening Standard

As election fever picks up across the country, the parties lob insults at each other on all manner of trivial and petty things, but pensions just do not get mentioned.

No one expects pensions to be an election issue, but imagine what the debate would be like if Gordon Brown had done to house prices what he has done to the nation’s pension system. The politicians would talk of nothing else and neither, one guesses, would the nation. The media would never let the subject rest. Yet the fact that the destruction of the nation’s private pension system is the biggest single indictment to be laid at the door of this government – and Gordon Brown in particular – will not get a mention. His tax grab on pension schemes, when he abolished advanced corporation tax on dividends in one of his first Budgets, turns out with hindsight to have been a truly disastrous decision. It was, however, made worse by the unforeseen effects of ill thought out legislation and regulation which added further to the costs of running schemes and their potential liabilities, creating a range of responsibilities and costs for plan sponsors which had never been remotely envisaged when the pension schemes were first set up.

Creaking under the strain

Yet even when the mounting problems were obvious to all working within the defined benefit (DB) scheme industry, when employers were beginning to close them to existing as well as new members and the whole system was creaking under the strain, government refused to recognise what was happening. It was asked over and over again to consider putting in place changes to legislation which would have allowed more risk sharing between sponsor and member and could have preserved the DB system intact, by putting a cap on the potential liabilities of the sponsors, but it always refused to act. Thus was its initial stupidity made worse by its bone-headedness later on. The pensions system never stood a chance.

Our system has been comprehensively wrecked in a way which, had we not actually seen it happen, we would not have believed possible.
This is a far bigger financial disaster and one with far more profound, long term social implications than is the damage done to public finances. The latter is the subject of much political hand wringing; the former is greeted with deafening silence.

The fact is that the public sector deficit is repairable and will repair itself with a bit of belt tightening and the resumption of economic growth. It won’t be easy, but with political will and leadership is do-able. The DB system in contrast is not repairable and yet it badly needs to be because the more one sees of Personal Accounts – the new universal second pension which was rebranded in January as the National Employment Savings Trust – the more obvious it is that it will not fill the void. Worse, in the view of many industry professionals, is that it will create the illusion of saving for a pension without the reality. People grossly underestimate the amount of money they need to set aside for their old age.

Personal Accounts with the low maximum to be saved and the small percentage of earnings which the employee will contribute if anything will reinforce that misconception and leave millions bitterly disappointed in years to come when their inadequate savings translate into a derisory pension.

And some time then, a generation from now, the government will have to recreate some kind of DB pension system not too unlike the one we have just so casually destroyed. That is when the true cost of what has been lost will be apparent to all. But much too late.

Anthony Hilton is financial editor, Evening Standard; anthony.hilton@ standard.co.uk