The not so merry go round of the Great Pensions

Lottery

BARRY RILEY

ALL we want is a bit of security in our old age, a reward for our long years of loyal labour. It does not seem a lot to ask, and a huge pensions industry has grown up to answer our needs. Yet we remain suspi- cious and fearful of pensions, and with good reason.

The personal pension providers now seeking to promote their images by para- ding across our ITV screens, especially during News at Ten when the ABC1s are more likely to be watching, think that a few jokes and jingles will soften our percep- tions. No doubt the pension plan salesman from the life assurance company will ooze a little more charm than the clerk in the company pensions office or the official at the DHSS. But our fear remains: we are out of our depth and we are horribly vulnerable.

The pensions industry is dominated by actuaries — mathematically-inclined pro- fessionals with a natural inclination to invent mumbo-jumbo even where none is necessary. Obscurity can be a great form of defence. They have done a great job in protecting the solvency and good name of pension schemes. All too often, however, this has been at the expense of many of the individual members, whose complaints have gone mostly unheard. Everybody has a tale of how they have been ripped off by company pension schemes, usually by getting back less than their contributions when they left a job. The worse hard luck stories were those of a million or so scheme members who were sacked or were persuaded to take early retirement in the industrial shakeout of the early 1980s. By freezing their liabilities in respect of these people, company schemes made many billions in profits during the subsequent bull market, when huge sur- pluses became the rule.

It was a typical example of the great pensions lottery in action. You buy a ticket, but when you come to claim your prize you are told that it is worth little or nothing because you have changed your job or there has been inflation or the rules of the scheme have been altered.

For years, inflation was the main prob- lem. Instead of providing proper index- linked benefits, companies have been allowed to take an easy way out by linking pensions to final salaries, even though hardly any employees stay with a company for the whole 40 years of a pensionable career.

It is rather like making shoes only in size six as an economy measure; the manufac- turer saves money, but it is hard luck on the majority of the population. Of course, it may not be until they are 65 that they realise just how hard the shoe pinches.

Nevertheless, company final salary schemes are hugely beneficial for long- serving executives who receive large salary increases in their final years. By a not-so- strange coincidence these are the very people who have a big role in deciding how schemes should be designed and operated.

Company schemes were allowed to carry on in this way because they did a deal with the Labour Government in the 1970s. Labour would look after the lower income groups through the State Earnings-Related Pension Scheme (Serps) which applied to people who earnt up to around one and a half times average earnings. Company schemes could add something on top, and could also substitute for Serps by contract- ing out of the state scheme while adding certain guarantees. It was sheer corporatism, and was soon attacked by the Thatcher regime. Her first administration forced the company pen- sion schemes to concede at least partial protection against inflation for leavers. More importantly, Serps was cut down to size on the pretext that population trends in the 21st century would undermine its economics.

You might wonder what kind of politi- cian is really worried about the next century. The crucial point was that if the benefits of Serps were reduced it would be possible for private personal pension plans to compete, at any rate for younger em- ployees whose contributions had a chance to compound over several decades.

So anybody could opt out of Serps, and people could opt out of company schemes too. Which is roughly where we have got to now. In April members of company schemes obtained the legal right to get out, a right which almost all companies had -previously denied them. And at the begin- ning of July the gun will be fired and several hundred thousand salesmen, inter- mediaries, accountants, estate agents and hastily retrained building society clerks will be off and running in the great race to sell the new personal pension plans to a be- mused public.

In truth the new contracts are not much different from the Section 226 plans which for years have been available to the self- employed or to employees whose com- panies have no scheme. But suddenly the potential market is vastly greater, though by no means uniformly attractive to the salesmen, who will not find it easy to maintain their lifestyles on commissions from basic £50 a month policies.

Personal portable pensions. They have a fine, alliterative ring to them. At last, can we be free of the curse of those arbitrary, paternalistic company schemes, whose be- nefits were liable to melt away under the actuary's hot breath? Perhaps we can, but unfortunately all we obtain is another kind of ticket for the Great Pensions Lottery, and who is to guarantee that it will carry better odds of winning the jackpot?

These are, in the jargon, 'money purch- ase' schemes. In other words, the money that you put in determines what you get out, subject to the returns on the invest-

ments. That means the stock market: yes, you will be tied to the 'Footsie' Index, and if it has a bad run for a decade or two, like it did in the 1930s and 1940s, it will be just hard luck.

During the 1980s the investment returns have been fabulous, at least up to last October's crash. For years fund managers have been able to achieve annual returns of around 20 per cent against inflation of four to five per cent. On that basis personal plans would perform very well. But it is much more likely that returns will go back to the unexciting long-run averages, in which case those mouthwatering brochure projections of minor millionaire status on your retirement day could lead to cruel disappointment.

It is a point that your company pensions manager will heavily emphasise. He will also point to the generous commissions and costs that will be charged against your contributions to a personal plan.

Yet the companies are being thrown into something of a tizzy. Should they restruc- ture their schemes? They may at least want to counter the threat that young people who for years have helplessly subsidised the older scheme members — might take their contributions elsewhere.

However, most companies are so far taking a very hard line. Employees who opt out of the scheme will be cast into the outer pensions darkness, with no transfer of the contributions which would otherwise be paid into the company scheme on their behalf (other than a minimal National Insurance Contributions rebate).

This highly restrictive line is being strongly backed up by trade unions, most of which regard personal pensions as an insult to socialism. 'How can both the CBI and the trade unions be wrong when they both support company pensions schemes?' asked a correspondent to the Financial Times the other week. Oh dear.

But all this is passing by the Great British Public who passively regard pen- sions contributions strictly as 'deductions' made by the powers that be, and by and large have no strong faith in their prospects for a high living standard in retirement.

Now the Great Pensions Lottery enters a new phase. Should you take a personal plan or choose the company scheme: a green ticket or a red ticket? If you want advice, you can go to the company pen- sions office, where the jobs depend on there being large numbers in the company scheme, or you can go to an independent adviser, who gets a commission only for selling you a personal plan.

How long are you going to stay with the company? You don't know. Will the stock market be firm over the next 20 or 30 years? Nobody can tell. Will you pick the best or the worst investment manager for your plan? You haven't a clue.

It doesn't have to be like this. But only the Inland Revenue could devise a strange, strait-jacketed type of investment plan where the beneficiary is locked in for decades and is forced to take the proceeds on a particular retirement day (not neces- sarily the day you actually stop working) in the form of an approved mixture of income and a cash lump sum.

Maybe there has to be a compulsory basic scheme to make sure that the poorer and less provident half of the population set something aside for their old age. But do we really need executive schemes, self-employed schemes with loan-backs and pension mortgages, and company managing directors awarding themselves huge pay rises at the age of 64 so that their benefits linked to final salary take a leap?

It is, of course, all to do with tax relief. The pension system has become the great middle-class savers' tax break, not quite so useful now that the top rate is down to 40 per cent, but a valuable bulwark against a future Labour Chancellor.

If the system were swept away for above-average earners we could all make many small and diversified savings deci- sions instead of one or two giant leaps into the financial void. We could even realise our savings when and how we wanted to.

Instead we are all nervous clients of the pensions industry. But don't worry. If you keep your ticket in a safe place your number may come up. Good luck!

Barry Riley is Investment Editor of the Financial Times.