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Verity&#39s View

If anyone needed cast-iron proof that the world of journalism is deeply submerged in the August silly season, they got it last week.

For just a few days, the correspondents covering the year&#39s stories of foot and mouth, rail safety and naughty Tories took time off and the remaining hacks started debating really interesting subjects such as pension policy.

A series of unlikely headlines hit the top half of the big bulletins. Bacon & Woodrow says pension schemes of 17 FTSE 100 companies are “underfunded” (whatever that means), up from seven last year. The Institute of Public Policy Research blasts Lab-our&#39s “unravelling” pension policy. Mercer&#39s says personal pensions and any moneypurchase scheme – by implication, including stakeholder – will do very little for your retirement income.

But if the news agenda is sufficiently uncrowded that pensions hit the headlines, it does not follow that we are really debating the problems. Something serious is emerging from all the evidence that is accumulating. Increasingly, it is staring us in the face.

But it creates such enormous problems that most people interested in pensions are still ignoring it.

While they are apparently addressing totally different parts of the pension world, the evidence from Bacon & Wood-row, Mercer&#39s and the IPPR has a common thread. According to Mercer&#39s, someone aged 30 could start saving 10 per cent of their pay this year, continue right through to 65 and still expect an income of just 24 per cent of their earnings at retirement.

That is down from 55 per cent for a 30-year-old who started saving 10 years ago. And, as the IPPR points out, the pension credit means that the first chunk of the savings is taxed at a very high marginal rate. B&W pointed out that more companies than before are going to have to throw millions into dwindling funds of their final-salary schemes.

The common thread is the same problem that brought Equitable Life to its knees. It is not just that the stockmarket has been dire. It is the fact that it is likely to remain so.

With inflation seemingly under control, interest rates and investment returns – ultimately the same thing – will stay firmly in single figures. Actuaries cannot pretend they won&#39t. They have to recalculate and the figures do not look so good. If employers gasp at the cost of maintaining a finalsalary scheme, can we really expect individuals to do what the low investment returns dictate they must in order to arrive at a decent pension – save 20 per cent of their salary? Only if they are affluent.

The truth is that the outlook for investment returns is now looking very bleak (if you disagree, look at the interest rates predicted by the bond markets). But no one dares to draw the obvious conclusion. If stockmarket returns stay low, the whole principle of saving for a private pension is undermined, if not discredited.

For employers, there is no joy because final-salary sch-emes are transformed. In the good old 1980s and 1990s, they were a cash cow, the surpluses of which could be used to fund redundancy (masquerading as early retirement). But surpluses are dwindling to nothing and, even to mighty companies such as Barclays and BT, final-salary schemes are becoming a serious liability.

Neither is there any joy for individuals. Even if they cripple their finances, putting a fifth of their salaries away, they will have to endure high rates of marginal tax because of the means-tested minimum inc-ome guarantee. And that is only partially mitigated, not to say horribly complicated, by Gordon Brown&#39s pension credit.

In the 1980s and 1990s, when private solutions to the nation&#39s pension problems were put forward, they looked better than the old State-based systems of pension provision only for one reason – the stockmarket was booming. Without that boom, the point is much less clear.

Imagine, for example, the sort of protest there would be if the cost of Serps was a tax of 10p in the £. Yet that is what you now have to pay to a private scheme to generate pretty much the same benefits.

The issue of how to ensure people have enough income in retirement should involve a pragmatic debate about the best, most workable solution for the long term. Private pensions in general were always going to be a less economic solution if only because of economies of scale. As the race for stakeholder market share demonstrates, low-cost schemes can only work if the scale is there.

Private schemes only looked like the best way to arrange a pension for as long as the stockmarket boomed. What we need in these days of slumping stockmarkets is a pension scheme which does not dep-end on them, which gives a defined benefit, is transportable without cost from job to job and is arranged as cheaply as possible on the greatest possible scale. Unfortunately, we have such a scheme already. But for ideological reasons – rather than pragmatic ones – we are abolishing it. It is called Serps.

Andrew Verity is personal finance correspondent for the BBC


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