the ones to foot the £700bn bill. Revealed: the true depth of pensions gap. With a few exceptions outside the oil industry and formerly nationalised companies, the only way anyone can still get a pension linked to a final salary is by joining the government's payroll.
Revealed: the true depth of pensions gap.
Teresa Hunter
teresahunter@scotlandonsunday.com
EMPLOYEES in private industry and other taxpayers are counting the cost of the government's climbdown last week over public sector pensions - as they will be the ones to foot the £700bn bill.
As Trade and Industry Minister Alan Johnson backed away from requiring state employees to work to 65 before they can receive a full pension, a Scotland on Sunday investigation into the pensions available to staff at Britain's 100 biggest companies reveals the extent to which they have become the new poor relations.
With a few exceptions outside the oil industry and formerly nationalised companies, the only way anyone can still get a pension linked to a final salary is by joining the government's payroll.
Our survey, published in detail below, reveals that 90% of employers no longer offer a final salary pension to new recruits. At Scottish & Newcastle, even employees in the closed scheme may face the prospect of being poorer in retirement than anticipated. The company is negotiating with staff to stop adding benefits linked to their final salaries, and instead base future pensions on average salaries.
These latest revelations are likely to trigger growing resentment by taxpayers, who are forced to stump up for the generous inflation-linked pensions enjoyed by civil servants and other government workers.
Shadow pensions secretary Sir Malcolm Rifkind condemned the double standards being played out between the public and private sectors. He said: "This adds weight to the criticisms of the past week. It demonstrates how out of touch not only the unions, but also the government, are with reality.
"Who will foot this bill? It will be other pensioners who may be struggling to get by on much smaller pensions."
This view is echoed by Sir Digby Jones, director general of the CBI. He said: "The world of pensions has changed. The days of paternalism are over. This isn't the sign of bad employers but of responsible ones, who are facing up to today's challenges. It is a pity the government, in charge of an ever-burgeoning public sector, is not being as responsible with taxpayers' money."
Robin Ellison, chairman of the National Association of Pension Funds (NAPF), was also uneasy at our findings. He said: "This is a graphic demonstration of how the scene has changed in less than 10 years. A decade ago, the UK offered a supplementary pension system that was the envy of the world; now it is in a state of disarray."
The picture painted by our survey is a blacker one than even the pensions industry itself expected. David Cule, a principal at consulting actuaries Punter Southall, said: "This highlights the stark reality of what has been taking place. The oil industry can afford to maintain final salary arrangements because it has plenty of money.
"But everywhere else the picture is not so rosy. Even the financial industry, the banks and insurance companies, which used to be the place to go to work for a decent pension, are not as good as they used to be. With the exception of Royal Bank of Scotland and Friends Provident, they too have given up their final salary schemes."
Stewart Ritchie, pensions director at Edinburgh-based Aegon, argues that discrimination against those working in private industry, compared with state employees, has upset the entire dynamics of the marketplace.
He says: "The pendulum has swung in favour of taking a job in the public sector. Developments on the pension front have dramatically altered the equilibrium in the workplace. Government workers always had better pensions and job security but they earned a bit less, so everything balanced out.
"Now the value of their pensions is so excessive compared with the rest of industry that the scales have completely tilted in favour of working for the government."
Boots offers a final salary pension to executive staff but others must spend five years in the stakeholder scheme. Energy companies such as Centrica, National Grid and United Utilities have maintained final salary pensions for engineers but not for other staff, leading to discrimination even within one company.
Other organisations, such as Southern Trent Water, will still offer final salary pensions to senior management only.
Cule believes the existence in so many companies of groups of workers with different pension arrangements could be storing up trouble for the future.
He warns: "Pensions will become a pay-bargaining issue, particularly as the numbers in a company barred from a final salary pension come to outnumber those enjoying one.
"They will be asking why someone doing the same job is effectively being paid a much higher sum through pension contributions."
The great mass of employees in private industry will have to rely on the vagaries of the stock market and the unpredictability of annuity rates for their pensions. The old guarantees of a comfortable pension after a lifetime in work have disappeared.
Most new employees will be offered some form of money purchase, stakeholder or group personal pension. How well these perform will depend on how much is invested on their behalf. Some plans are non-contributory, such as the Gallaher Group's, which invests 16% on behalf of employees, and Aviva's, where 8% is invested.
The concern is that not enough is being invested to provide a decent income in retirement. While employers are typically injecting more than 20% of salary into final salary schemes, contributions into the new alternatives can be half that, or less.
The general consensus is that 15% of salary throughout a person's working life should be put by to provide a decent nest egg to fund old age.
Given the uncertainties surrounding money purchase pensions, and following the disappointing outcomes of those which have already matured, there is a small but growing trend among enlightened employers to reject them in favour of a 'career average' scheme. This is where pension is not based on final salary but an average of your entire career.
This is increasingly seen as a fairer alternative and allows companies and staff to share the risk. It has the attraction that it can cut costs for employers while providing staff with some level of guarantee.
Some employees, whose careers peak in their mid-40s, may do even better than with a final salary scheme.
A spokeswoman for Tesco, which offers a career average pension, explains: "Our staff tend to cut their hours as they approach retirement, so our typical career progression sees salary peaking in the 40s."
A couple of firms, such as Barclays, offer a hybrid scheme. At Barclays, for example, staff are guaranteed 20% of annual salary, topped up by a money purchase arrangement.
One surprise from the survey is that the feared withdrawal by companies of final salary benefits from employees in closed schemes has not yet materialised. That said, British Land has all its pension arrangements under review. And Scottish & Newcastle is currently negotiating over its final salary scheme.
Ritchie warned against complacency. He said: "This will be the next tidal wave. It has already stopped at many smaller and medium-sized companies but has yet to hit the large organisations."
NAPF chairman Ellison said he hoped next month's report from Adair Turner's Pensions Commission would lead to a new pensions structure in the workplace.
He says: "It may be a little late for many, if not most companies, but I hope the commission will give private sector employers a sensible regulatory framework in which they will be free to offer the kind of pension arrangements they and their workforce would like to enjoy."
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