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The final countdown

Hargreaves Lansdown pensions research manager Tom McPhail fears that NAPF chief executive Christine Farnish may be right in predicting a five-year life expectancy for final-salary schemes

Tony Hazell at the Daily Mail thinks she was wrong to say it. He believes there is a whiff of self-fulfilling prophecy about Farnish’s assessment and that it will only encourage policymakers to hasten the schemes’ demise.

He is right that similar plain talking 20 years ago precipitated the abolition of tax breaks on mortgages. However, back then the mortgage industry was doing quite nicely, thank you, while today’s pension industry has problems which need addressing urgently.

Pension Protection Fund chairman Lawrence Churchill has announced that the PPF levy might be “somewhat higher” than the 300m a year originally calculated by the Government.

Total sector liabilities amount to 1tn and deficits are running at around 134bn. That is 134bn which is not going to find its way back into the economy for years and which will, in theory, be stripped out of corporate profits and be invested in the schemes instead.

Has anyone projected what this will do to economic growth? Perhaps no one has bothered because it seems unlikely that the money will ever be invested and the deficits will ever be closed.

Instead, some schemes will go bust and claim on the PPF. I know they are nothing to do with each other but the sorry mess made of the Fin- ancial Assistance Scheme does not fill me with confidence that the PPF will deliver smoothly and efficiently. The deal to sort out Heath Lambert, involving the PPF taking a stake in the company, appears to work but it still looks like a pretty high-risk investment strategy if repeated too often.

The funding problems are unlikely to get better and the headlines will get worse. In the meantime, the weight of debt associated with these schemes will drag back corporate activity, stifling takeovers and undermining the competitiveness of those companies unfortunate enough to be saddled with deficits (actually, that is most of them).

The PPF is simply rearranging deckchairs on the Titanic. The same limited pool of money gets reallocated to meet the most urgent needs, thereby pushing the problem back on to younger members.

What happens if the global economy hits the buffers of an oil price shock or if the US ever lets its budget deficits catch up with it?

The final-salary balloon has run out of ballast to throw overboard and is even now scraping the tops of the waves.

The longer a reality check is deferred in private-sector pension schemes, the longer it will be considered acceptable to rack up billions upon billions of pounds of deferred taxation to pay for public-sector schemes.

Bradstock agreements, where trustees agree a lower funding rate in order to stave off having to bankrupt the employer, seem to offer some kind of a way out. If schemes were allowed to negotiate reductions in benefits such that they could then be reasonably certain of meeting these lower levels of benefits, then we could all move on and attend to persuading the population to defer some of its consumption until after retirement. It might upset a few people, though.

At a recent Scottish Widows/Fabian Society press conference, Work and Pensions Secretary David Blunkett announced that he will be publishing his own review of pensions in the autumn, ahead of Adair Turner’s report.

The press release issued at the same time is ambiguous and maybe suggests that the report will only focus on the issue of women’s pensions. But I was there and it sounded to me like he was promising a more general review – an alternative to Turner.

Whether it is just about women’s pensions or the wider issues, though, it looks to me as if Turner, whose first report contained a whole chapter on women’s pensions, is getting pushed to the margins. I hope he is well rewarded for the work he has done.

In the same press conference, Blunkett also focused on the question of auto-enrolment, announcing that the Department for Work and Pensions has formulated a solution to the problem caused by the European distance marketing directive which prohibits the auto-enrolment of employees into group personal pensions.

The solution is to write membership of the GPP into their contract of employment. However, this does provoke a couple of observations. First, there are thousands of employees who already work in jobs where membership of the group personal pension is not written into their contract so employers and their advisers would be faced with a massive redocumentation exercise.

Also, would it be too cynical for me to suggest that it would be a but short step from having scheme membership written into everyone’s contract of employment to introdu- cing compulsory employer contributions?

Blunkett is right to focus on the workplace, though. He seems very taken with research which shows massive increases in scheme participation where an employer contribution is introduced.


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In Focus — May 2015: private medical insurance market in Germany

Welcome to the latest edition of In Focus. In this issue, Jelf examines the private medical insurance market for employers with expatriate workforces in Germany. This includes the common challenges faced in sourcing appropriate coverage, along with a selection of available solutions. This will be of particular interest to HR/reward decision makers with employees based in Germany. It will assess the cultural norms, risks and backdrop that are relevant to organisations with expatriate staff in this location.


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