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The black hole of final-salary schemes

It seems to me that most people in the financial services industry and the Government fail to see how illogical final-salary pension schemes are in a capitalist society, as the liability is open-ended and, as such, cannot be justified in a prudent economy.

Nic Cicutti in his column says that final-salary scheme employees contribute a third of a pension fund and only get 6 per cent of its assets. (Money Marketing, January 12).

Although this is too much of a generalisation, knowing the variations of scheme benefits between employer schemes, such imbalance has only occurred because the Government, whichever party, has failed to put in place the necessary safeguards.

I would be most interested to know how much of the pension fund is created as a result of the employer paying lower National Insurance contributions on contracted-out schemes. This is not usually taken into account when stating how much the employer contributes.

If we follow Nic Cicutti’s idealistic approach that public sector final-salary pension schemes should be retained for nurses and civil servants, etc, then, although such schemes are not economically sound, we must all accept that these will be paid for out of taxation, including council tax.

If so, does this not, in effect, become an additional state pension? If so, should not all eligible employees, from whichever sector, be entitled to receive similar pension benefits?

I have put it this way so as not to put down Nic Cicutti’s approach but just to prove how unviable such schemes are – exacerbated by many public sector schemes actually being unfunded.

The sooner everyone realises that final-salary pension schemes will always be a black hole, the better, but getting those with vested interests to agree – trade unions, public sector employees, charities, mutuals, oil and newspaper companies and so forth – will be nigh on impossible.

One company stands out with its foresight and that is Legal & General, which, I believe, ceased its final-salary pension scheme in 1993 without such fuss. Now that is prudential.

Roll on the day when the people in control know what they are doing and consider all consequences of their actions before implementing changes.

Peter Amott




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