If the FPC was a truly relevant exam that asked all the tough questions, the last page of the 2003 summer paper would read something like this:
“A client aged 30 turns up at your office. He has started work at a medium-sized, long-established steel company which has, according to the personnel department, one of the best forms of final-salary scheme around based on 60ths, with an employer contribution of 4 per cent matched by an employee contribution of the same amount. The scheme is fully funded under the minimum funding requirement.
“However, a friend of his has pointed to reports in the financial press quoting the company's annual report, stating that prospects for the group are bleak. US steel quotas and competition from other suppliers, some of them supported by the Prime Minister, are sending the group into loss.
“It hopes to survive what it thinks is a temporary glitch and thanks shareholders for their continuing loyalty to the group. His friend contradicts the personnel department, saying he would be safer getting his own personal pension. What is your advice?” At first, you might think the answer's straightforward. Few financial advisers these days would enjoy being spotted by their boss or even their partner recommending not joining, opting out or transferring from an employer's scheme in favour of a personal pension, especially not when the employer is chipping in significant amounts. If you do not want to be accused of misselling, you would not recommend a personal pension.
But think what would happen if you recommended joining the employer's scheme. The risk is that the company might go bust in the next two or three years. Even if it was fully funded under the MFR, it might have barely half the money really needed to pay the benefits promised to staff.
Making matters worse is the order of priority in the Pension Schemes Act, which means most of the fund has to go to paying those already drawing their pensions. In the real case of ASW, this meant that people who have been contributing 5 per cent or more of their salary every year are getting back only a fraction – perhaps less than a third – of what they had been promised.
Suppose that five years from now, the steelworker returns to your office shortly after the company has gone bust. This time it is even worse than in the ASW case. The pensioners get their money first. Then, following the Pickering reforms that sprang out of the December 2002 Green Paper, the over 50s get a bigger share of what is left after that. As a result, there is even less left for the younger contributors. In fact, as is more than likely, there is nothing at all.
How, he complains, could you, the trusted IFA, have recommended joining this final-salary scheme when you were already aware how insecure his pension savings would be as a result?
The loss of the employer's contribution, in other words, is surely only a small consideration next to the insecurity of final-salary schemes. Unless the young person joining the firm is fairly sure that it will(a) still be trading and solvent when he retires and (b) will not have wound up his pension scheme (at least not before he turns 50), then recommending joining it is dubious advice.
If I were an IFA, I would be telling the client: “Sorry, I can't help you as to whether you take out a personal pension or a final-salary scheme. For the sake of my reputation, I can't recommend either. Please do nothing about it whatsoever, at least so long as I am advising you.” I doubt if this would put me in breach of the Financial Services and Markets Act but it would be a shame because the steelworker would be poorer in retirement.
The failure of the Government to address the insecurity of company pension savings is no trivial issue. There is nothing to stop an employer winding up a pension scheme, even when the employer is solvent and even when, say, the firm has been taken over, the benefits are only indexed to inflation – not earnings – meaning even final-salary benefits may not keep their value over two or three decades.
If pension savers cannot be sure of the security of their money in a final-salary scheme, and if that security depends on their employer remaining solvent and deciding to keep their pension scheme going, then a final-salary scheme is a much less attractive proposition than it should be.
The DWP has been consulting on this for two years and still appears not to have much of a clue. The Green Paper mentioned suggestions such as a central discontinuance fund, even though some of the civil servants who wrote it participated in discussions about this issue before the last Pensions Act, when it became clear that solutions, including such a fund, would not work.
Pensions, as the European Court has said, are deferred pay. Right now, asking someone to join a final-salary scheme is the same as asking them to give up a big part of their pay and put it in a place where it might simply disappear. If IFAs are to be able to give an honest recommendation to clients to join a final-salary scheme – rather than take a personal pension – those final-salary schemes must be more secure.
Andrew Verity is a personal finance reporter at the BBC