Have you heard the one about the IFA who advised a deferred member of the Iceland final-salary pension scheme to transfer his benefits into a withprofits personal pension with Norwich Union 10 years ago, saw the case reviewed under the pension review and had to pay thousands of pounds in “compensation”?
Now that Iceland has closed its final-salary pension scheme to existing as well as deferred members, do we take this to mean that the scheme has become unaffordable and unsustainable for the future?
If so, should we not now have another pensions review to compensate financial advi-sers for what in many cases may have been sound but not very well documented advice?
No, I am not crazy, but this Government's insistence on the PIA punishing many innocent IFAs in this pension review is – as is the whole of Government policy on pensions.
We all recall the Mirror Group pension scandal and the raft of pensions legislation that followed to “protect” existing and deferred members of final-salary schemes. On top of that we have seen this Government scrap tax credit repayments on dividends for pension schemes – a true pensions scandal to the tune of £5bn a year and rising. This will dwarf the so-called pensions misselling scandal of 1988 to 1994 because it will go on indefinitely.
Demographics are changing dramatically. There will be far too few people of working age to support pensioners in the future. People are living longer so pensions will need to be paid for longer periods.
It was forecast a number of years ago that Serps would go bust by the year 2030. Unless significant changes are brought in to private sector final-salary pension schemes, they are set to go bust too.
As for public sector final-salary inflation-proofed pension schemes, forget it. These are not even funded, they are ghost funds. The only way to fund them is to tax all taxpayers to the hilt.
In the last month 45 private sector final-salary pension schemes closed to new members who are now being offered less generous money-purchase schemes – including lower employer contributions. This trend looks set to continue.
What is more concerning though is the announcement by Ernst & Young and Iceland that they are closing their schemes to existing as well as deferred members. That is a significant change – if a major international firm of chartered accountants does not think the numbers add up they are probably right.
What is likely to happen in the future? First, the trend away from final-salary to money-purchase pension schemes is set to accelerate. For those remaining private sector and public sector final-salary schemes to remain in force it will take major funding from employers, employees and the Government to sustain them, which means higher employee and employer contributions and higher taxes.
What we will probably see are later pension ages being brought in, which has already started with state pensions for women and equalisation of pensions in private sector schemes usually resulting in women's retirement ages changing from 60 to 65. Other benefits in these schemes will become downgraded too.
While it is not entirely the Government's fault that we are in this position today, it certainly is true that most of the blame should be directed at it. Years of muddled thinking and a lack of foresight and planning have created today's situation.
The benefits that have to be provided by these final-salary schemes under Government legislation have become far too generous and unsustainable. Too often the Government's hunger for shorter-term fiscal gain, for example, the £5bn tax credit windfall to the Treasury, has been overcome by longer-term fiscal loss such as fewer schemes and lower contributions.
We are now in the crazy situation where a senior civil servant can retire on a fully index-linked pension of £40,000 a year together with a tax-free lump sum of £120,000. On paper, that makes the ex-civil servant a pension millionaire because you would need a lump sum of £1m to buy the equivalent annuity at age 65 for a male today on the open market.
And MPs qualify for maximum service civil servant index-linked pensions even if their pensionable service is less than 40 years – and in many cases significantly less. Do I hear that word scandal again? And you thought I was crazy at the start of this article.
Tony Byrne is business development director at Byrne Williams