For many years, the defined-benefit scheme has been recognised as the Rolls-Royce of pension plans. Sadly, that is no longer the case.
Earlier this year, I took part in a TV programme which examined the state of the pension crisis in the UK. During one of the lengthy breaks between filming, I had the pleasure of listening to the story of one of the other participants.
Pleasure may actually be the wrong word because the story he had to tell was quite the opposite.
John had been a member of his firm's final-salary scheme for almost 30 years. If I remember correctly, it was a 60ths scheme and therefore John and his wife were looking forward to a retirement income of about 50 per cent of his earnings. They had worked hard and felt this was a fair reward for their endeavours. Then it all went badly wrong.
His employer got into financial difficulty during a time when the pension fund value fell dramatically as a result of the equity market decline. The firm went into liquidation and a buyer for the business as a going concern could not be found.
The fund was massively in deficit and John and his fellow employees suffered the consequences. Their pension benefits are now next to worthless. Interestingly, there was also a rumour of senior people leaving with full entitlements ahead of the company going into liquidation.
John has spoken to MPs in Westminster and Cardiff and none of them can do anything about the situation.
To John and his colleagues, it seems that politicians talk a good game but do not add any value. The most outrageous comment came from one member of the Welsh Assembly who told John there was nothing that he could do and that he should “get on with his life”.
The fact that John and his wife now pay higher local authority rates partly to help fund that politician's own pension fund seems to have completely escaped him.
What could I say to John? Nothing that could have been of any comfort. The final-salary pension system has let him down badly. If he had he known that there was any risk, he would have perhaps have made other provision.
Successive legislation has done little to help the likes of John. The Pensions Act 1995 was designed to prevent fraud and theft and was the proverbial sledgehammer to crack a walnut. It does nothing at all to protect a scheme member against the circumstances experienced by John.
We now have the introduction of pension simplification and steps to prevent an employer from winding up while solvent in order to avoid their pension liabilities.
On top of this, an insurance scheme to protect some of the pensions accrued by members will be in place soon but, sadly, not soon enough.
The scheme will also be paid for by pension schemes – which seems to me to be akin to kicking them while they are down.
Surely, at the very least, the insurance premium should be paid for by the Government? After all, Chancellor Gordon Brown has robbed more out of pension funds with his stealth tax than Robert Maxwell could have dreamed of getting – £5bn a year since 1997 and still the Government cannot find a cure for the pension crisis.
Final-salary schemes are in decline – we are all aware of that. Closure to new members is one of the steps to a slippery slide downhill. There will not be a soft landing – it will look much more like a car wreck.
If there is no cross-subsidy of younger members paying for the pensions of older members, then the rate of closure will accelerate.
Sensible business owners will seriously have to consider closing their schemes – and the sooner the better. Closure to new members does nothing to solve the past funding problems and wind-up will be the only answer.
Increased life expectancy, lower future investment returns and increased costs will all contribute to the terminal decline of these schemes.
Pension simplification is not the answer and only the most naive of politicians will believe that it is. With the general reluctance of the public to save for the future, the Government response is to fiddle while pensions burn.
Final-salary schemes will – for all but a small minority – become a thing of the past.
Nick Bamford is the managing director of Informed Choice