Thursday, 12 July 2007

Pensions - the bad news

There has been a string of stories in the news lately that point up the ongoing pain we are likely to face in relation to pension provision. Today's FT reports that life expectancy is rising more quickly than actuaries have allowed for. That's good news - obviously! But just as obviously it puts a further strain on the funding of pensions.

As the FT states -

A one-year increase in life expectancy could increase the total UK private sector pensions bill by £30bn-£40bn. It could also force life insurers to add £3bn -£4bn to their reserves. The projections could wipe out gains in pension scheme solvency that have come about through rising markets and increased provision.

Meanwhile occupational scheme membership is dropping. ONS stats show that membership dropped by 500,000 between 2004 and 2006, with 200,000 less active members of schemes in the private sector, and a slight increase in active membership in the public sector (remember this!). The remainder of the fall was in pensions in payment (you work it out...).

The decline in active occupational scheme membership is of course driven by the closure of such schemes to new members. According to the Association of Consulting Actuaries 4 out of 5 defined benefit schemes are now shut to new members. See this report.

More worrying is that the trend in employer contributions to the new DC schemes that are being set up is, apparently, downwards. From the ONS Stats -

From 2004 to 2006, total contribution rates to private sector open defined contribution schemes decreased by 0.2 percentage points to 8.9 per cent of pensionable salary. Member contributions increased slightly from 2.9 to 3.0 per cent while employer contributions declined from 6.2 to 5.8 per cent.

This suggests that the newer DC schemes being set up (as employers switch over from DB) are less generous. I wouldn't be surprised to see this continue going forward.

The labour movement is often very good at misinterpreting victories and defeats. Put simply, we got spanked in the private sector, and the collapse of DB provision there is a massive defeat. However, in contrast we have done well to hold the line in the public sector. We should keep this is mind, rather than seek to play down what has been achieved, or even suggest it's been a defeat. We would not have achieved what we have without a Labour government, and if the Tories get back in next time expect to face a major attack on the public sector schemes. One to remember next time you feel tempted to engage in a bit of "friendly fire" against Gordo over pensions.

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