If people knew or cared enough about pensions to know what they really wanted, they would want final-salary pensions.
They’d want to know that, after working for 35 years or so, they could retire on an annual income of something like two-thirds of the salary they were paid in their last year at work.
They’d want to know that the sum would never be eroded by inflation – it would be linked to retail prices index (RPI) inflation forever.
And they’d like to know that on their death their spouse would keep getting a good part of the money.
In the private sector, however, wanting isn’t getting. Providing pensions like this is hideously expensive. The number of schemes offering them has halved in the last six years.
Today only 1.6 million private-sector workers have salary-linked pensions. And even those 1.6 million might be about to find that their pensions won’t be quite as they hoped.
The government published a consultation paper last week (‘Reshaping Workplace Pensions for Future Generations‘) with the aim of finding a way to make the remaining schemes less expensive to run and so less likely to be axed.
The paper suggests that companies should be allowed to shift the retirement date of their employees out; that they should be allowed to scrap the spousal pension bit of the deal; force anyone changing employment to switch out of the final-salary scheme and into a defined-contributions deal (where your payout depends on investment performance); and worst of all (from an employee’s point of view), scrap the inflation linking of the payouts.
Some of this is perfectly reasonable. After all, why should a company continue to bear the pension risk for an employee who works for them in his 20s but leaves in his 30s? It also won’t affect all those happy retirees already living off inflation-linked final-salary pensions (can you feel my envy?), nor the entitlements already built up by those in work.
And we all know how expensive final-salary pensions have become to provide as investment returns have fallen and life expectancy has risen.
However, assuming pensions minster Steve Webb gets what he wants out of the consultation, it does pretty much spell the end of the perfect pension for anyone in the private sector. No new final-salary pensions will open and those that still exist will end up substantially watered down from here.
On the plus side, it looks like there will be one group who keep getting the kind of deal the rest of us all really want: public-sector workers, five million of whom are currently enrolled in salary-related schemes.
“Taxpayers are still going to guarantee the pensions for public-sector workers for many years ahead”, says pensions expert Ros Altmann. “I do hope public-sector workers will value and appreciate just how generous their pension arrangements are in absolute and relative terms.”