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Verity&#39s view

Three weeks ago, a Radio 1 news hack sent an email to the BBC&#39s entire corps of journalists appealing for help. Temporarily bored with Big Brother, Newsbeat was running out of zippy, exciting news ideas with which to fill up its bulletins and was looking for any stories relevant or interesting to young people to liven up its bulletin.

So I suggested pensions.

Yes, yes, I explained in my emailed reply, I know it is not exactly funky. If Newsbeat&#39s morning newsreader Andrew Fletcher so much as mentioned it, he would no doubt be slagged off mercilessly for months by Sara Cox.

I doubt if even the sharpest fox of an IFA would succeed in shifting a single with-profits plan down at Radio 1&#39s live summer location on the sun-scorched beaches of Ibiza.

But I was determined to persuade them they could sell it as a serious story of outrageous injustice inflicted on victims not even aware of their plight, a story of the older generation treading on the younger generation – even robbing them – while their political representative looked the other way.

That, after all, is nothing more than a true description of what the closure of final-salary pension schemes to new members really means. Only four out of 10 of the final-salary schemes being run by employers are open to new recruits. Most, though not all, of those new recruits are young people.

Now for many of those young people, it may not even be good advice to join a finalsalary scheme. After all, as the best pension advisers know, final-salary schemes have for years been a bit of a con as far as young people are concerned, designed to make new, young employees subsidise the retirement costs of older employees in their parents&#39 generation.

Compared with what you contribute, the value of the benefits you accrue is much higher when you are close to retirement than when you are starting your scheme membership. If you leave early, the frozen benefits you get out only grow in line with inflation.

So, unless the stockmarket is going to grow by less than inflation, a new recruit in their 20s who planned to change jobs after a few years would be better off with a money-purchase scheme.

That, of course, was one of the very good reasons that financial advisers gave for opting out or transferring from a final-salary scheme to a moneypurchase pension.

It is also one of the reasons why Alan Pickering&#39s suggestion that employers should be able to force employees to join pension schemes – as if any of them would – is debatable.

Closing final-salary schemes to new recruits and making them join money-purchase schemes (including stakeholder schemes) is almost exactly parallel to the transfer and opt-out scandal. For young people at least, it never mattered very much whether they were in a final-salary scheme or a personal pension. Similarly, it should not matter very much if they are barred from joining a final-salary scheme and offered a moneypurchase scheme.

True, in both cases, the risk of investing on the stockmarket is shifted from employer to employee. But ultimately that does not matter. The employee may lose out if the stockmarket slumps, getting a poorer pension than they would from a final-salary scheme. But equally, they may gain massively if the stockmarket roars ahead, beating what they would get from the final-salary scheme and keeping anything on top of that.

Given enough time to invest – time that young people have – it is an even bet. In fact, many IFAs would have been right to recommend transfers or opt-outs but for one crucial fact: the employers&#39 contributions.

Employers contributed handsomely to final-salary schemes but not to personal pensions. That is the great reason that made it so clearly against the employee&#39s interest to take a personal pension when they could have joined an employer&#39s scheme.

In the last eight years, life offices and IFAs have been forced to pay out hundreds of millions of pounds in compensation to “non-joiners” – employees who might have joined a final-salary scheme but took out a personal pension instead. What they were being compensated for was the fact that they lost out on employers&#39 contributions.

Now what is happening to new recruits at employers which have just closed their finalsalary schemes is exactly the same in its effects. There is nothing wrong in principle with the fact that they are being offered a money-purchase scheme instead of a final-salary scheme.

In the long run it is an even bet. What is wrong is that in almost all cases, the employer&#39s contribution to the money-purchase scheme is much lower than it was to final-salary schemes – typically 7 per cent compared with 15 per cent of salary.

Luckily for them, employers do not have to offer best advice. IFAs are legally obliged to serve their clients&#39 best financial interests or pay massive compensation but there is no such obligation on employers.

Pensions, as the European Court has frequently stated, are deferred pay. The switch from final-salary to money-purchase, as I tried to explain to the Radio 1 hack, was not really a complicated story. It is simply that the pension contributions are being cut.

It is a pay cut for new recruits compared with those already in the organisation. As such, it is a massive story. The biggest pay cut across all industries since the Second World War and it is young people – the same people who cannot get on the housing ladder and are weighed down with student debt – who are being hit.

My words were wasted. The Radio 1 hack warmly praised my efforts and then informed me that all the audience research showed people in the 15-24 age bracket are not interested in pension stories, no matter what.

They have got better things to worry about such as music, clubbing, drugs and the opposite sex. Too right – ignorance is bliss.

Andrew Verity is personal finance correspondence at the BBC


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