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Pensions Theft – A Disaster in the MakingWhy the Trade Unions must defend Defined Benefit and mutual pension schemes

Malcolm Povey, Leeds

ContentsContents.........................................................................................................................................................2

Introduction.......................................................................................................................................................3

The Pensions’ Myth (5).......................................................................................................................................4

The bosses argument for pensions reform.....................................................................................................5

Bosses argue that Pensioners live much longer and they can’t afford to pay for them..............................6

Bosses argue that Final Salary DB schemes are unfair................................................................................6

Pensions are regulated to death.................................................................................................................7

Why Defined Benefit Schemes are better than Defined Contribution Schemes...............................................10

Key Differences in How Investing Occurs in DB Plans vs DC Plans:...............................................................11

Mutual schemes versus private schemes.....................................................................................................11

Pensions management fees are far too high................................................................................................11

Why employers’ do pensions...........................................................................................................................12

Recruitment..................................................................................................................................................12

Retention and return....................................................................................................................................12

Redundancy..................................................................................................................................................12

Fungibility of assets......................................................................................................................................12

Economically efficient...................................................................................................................................13

The State Pension.............................................................................................................................................13

National Pensioners Convention view..........................................................................................................13

Summary of proposals (28).......................................................................................................................14

1. Introducing a single-tier state pension.................................................................................................14

2. The effect on existing pensioners.........................................................................................................14

3. The future of means-testing.................................................................................................................14

4. The cost of the new pension.................................................................................................................14

5. The impact on occupational pension schemes.....................................................................................14

6. The State Pension Age..........................................................................................................................15

What’s wrong with the White Paper?......................................................................................................15

What to do? An alternative pensions strategy.................................................................................................16

Changes to USS.............................................................................................................................................17

Comparing USS and TPS............................................................................................................................17

The Current UCU Negotiating Position.........................................................................................................17

An alternative Trade Union strategy on pensions........................................................................................18

Works Cited......................................................................................................................................................18

Pensions Theft – a Disaster in the Making

IntroductionAs this is written there are fears that the UK will enter its third recession in as many years, the world economy as a whole is often described as ‘depressed’ and fears are now being expressed for the hitherto dynamic Chinese Economy. From a Marxist point of view it is the falling rate of profit (1) (unit of capital returned or profit per unit of capital invested) that underlies this economic crisis; the response of the boss class to previous phases in this crisis has been to cut the salaries of workers, to increase working hours and to introduce new, more capital intensive but less labour intensive means of production. The current crisis is no exception and this briefing addresses the impact on employees’ pensions, otherwise known as deferred wages. The pension funding situation in the UK is so bad that if a typical British and a typical Dutch person save exactly the same amount for their retirement, the Dutch person will end up with a 50% larger pension.

Currently a draft pensions bill (2) is undergoing consultation, although most people are unaware of this because it has all party support together with that of the TUC (In a document not ironically called “Third Time Lucky” (3) ) and is therefore seen by the press as non-controversial. It claims to be “making pensions fairer”.

Contrary to its claims and those of its supporters, The Bill is an unashamed and naked class attack on ordinary working people and their families; the Institute for Fiscal Studies predicts that the reform is actually likely to net the Treasury an annual windfall of at least £9.2bn in extra National Insurance contributions against a background where state pension provision in the UK is already amongst the worst in Europe. As a crude measure of its effects, pension fund members will have to work another five years of their lives in order to accrue the same pension as today’s pensioners. In an attempt by the Government to have its cake and eat it, The Bill is driven in part by a recognition that a societal crisis is in the making as younger workers choose not to save for retirement, using their wages instead to provide for current needs, such as house rental. The fear is that following the privatisation of the health service and social provision, workers will have to ‘work until they drop’ and the future social costs of supporting old people unable to work will be too high.

The ‘solution’ is on the one hand to force people to ‘save’ through an ‘auto-enrolment’ scheme [Table 1] which forces employers to enrol their workers in a pension scheme, the default being the ‘National Employment Savings Trust (NEST) [Table 2]’. On the other it is to increase employees’ contribution to existing pension schemes, reduce our benefits and reduce the employers’ contribution. 8 million people will be enrolled in works pensions schemes over the next month. Letters are being sent to employees as this is written. One danger is that employers will enrol employees into private pension schemes. These schemes have a dreadful record and usually fail even to protect savings against inflation. In fact, they are often so bad, that it would be better to keep money in a box under the bed. From this point of view, public and mutual pension schemes such as TPS and USS are a far better bet since they provide some safeguard against inflation.

The Labour Party see a political opportunity in auto-enrolment and their Shadow Pensions Minister Greg Clymont is currently supporting the draft pensions bill. However, once employees discover that they have to pay 3.4% of their salary, rising to 8% of earnings after eight years (Table 3) into a Defined Contribution (DC) pension scheme chosen by their employer, whilst the employer need pay no more than 3%, they may choose to opt out and then the bill’s supporters will have some explaining to do.

The current crisis could lead to a future crisis in that 25% of the working population are not saving for their retirement whilst the 2004 regulatory changes make existing pension funds seem poor value for money. The all party proposals are unlikely to prevent this crisis. Therefore trade unionists need to campaign for an alternative pensions strategy.

For a more conventional overview of the current pensions situation in the UK see (4).

The Pensions’ Myth (5)On November 30th 2011 the UK experienced the largest general strike in 30 years when public sector workers participated in a one-day stoppage of work, involving health workers, teachers, higher education, social workers and civil servants at central and local government. The strike was over the government’s plans to reduce the value of

Table 1

Automatic Enrolment into private pensions from 2012 (4)

The previous Labour Government acted on the recommendations of the Pensions Commission and legislated in the Pensions Act 2008 for the introduction of automatic enrolment into private pensions for all employees between age 22 and State Pension Age to be staged in from October 2012.

Employees will have the right to opt-out. The Pensions Act 2011 sets the earnings threshold above which every worker should be auto-enrolled at the same level as the income tax threshold, £8,105 in 2012/13. Contributions become payable on band earnings over £5,564 and up to a limit of £42,475 in 2012/13.11 Upon auto-enrolment, after a phasing-in process of 6 years, minimum total contributions of 8% of earnings within designated bands will be paid to a qualifying pension scheme, with a minimum of 3% from the employer.

Employees can also contribute and the Government will contribute through tax relief. The specific employee contribution rate will depend on the employer contribution. The Government contribution will be proportional to the employee contribution, as it is calculated as tax relief on employee contribution. If the employer decides to contribute the legal minimum of 3% of band earnings, then the employee will have to contribute 4% and the Government will contribute 1% through tax relief. 12 However, employers will decide whether they want to contribute the legal minimum or more.

Table 2

National Employment Savings Trust (NEST) (37)

The Pensions Act 2008 legislated for the introduction of a new pension saving scheme of low-cost, individualised pension savings accounts from 2012 called NEST (National Employment Savings Trust). NEST is now active and accepting members. Once auto-enrolment begins, employers who do not offer an occupational pension or a stakeholder or other qualifying pension scheme will be able to auto-enrol their employees into NEST, provided that the employee’s earnings are above the current auto-enrolment threshold of £8,105. Employees with earnings below this level will be permitted to opt in to the scheme. There will be a contributions limit of £4,400 a year (2012/13) into NEST. NEST has a low-charging structure. Members are charged an Annual Management Charge of 0.3% of the fund per year. However, until the startup costs of the scheme are recovered, NEST members will also pay a 1.8% charge on contributions.


public sector pensions while increasing the contributions that must be paid by workers towards their pension and making them work longer before getting it. This would cut the value of public sector pension by over 15% while increasing the cost and work time involved in receiving them. Given that top executives in the banks and big corporations, ministers in government and MPs in parliament are not taking similar cuts, millions of public sector workers were enraged at these ‘reforms’, as well as the majority of the electorate.

The government argues that it is doing this because the current pension system is unaffordable. This is the pensions myth. The myth is constructed from four components: pensioners are living longer, employers cannot afford to pay for pensions, final salary schemes are unfair and pension funds are insufficient to cover current liabilities.

The bosses argument for pensions reformConfidence in final salary schemes was severely challenged by a number of scheme failures. One was the Mirror Group Pension Fund (Remember Robert Maxwell?) but a string of other schemes hit the press including Swan Hunter, Belling, Allied Steel and Wire and United Engineering Forgings. Whilst the actual outcome for members varied between these schemes, the public were left with the view that schemes were not as secure as they had previously thought. In the case of British Coal in the 1990s, where the company pension scheme lost its sponsor and pensioners were faced with losing most of their pension (6), a Pensions Protection Fund (PPF) (7) was set up; levying pensions schemes as insurance against collapse. The introduction of the PPF was meant to restore confidence but has not been entirely successful. The gap between benefits covered by the PPF and member’s full benefits and the publicity given to schemes entering PPF have both been unhelpful to member confidence. Speculation that ‘one big scheme failure’ could break the PPF has also not helped. Whilst these are contributory factors, it must be noted that the pressure to move away from schemes has not come from members but from employers.

In 2004 the government in the Pensions Act that year established a Pensions Regulator (4) to force pension funds to adopt certain actuarial practices which it was thought would secure Defined Benefit Pension Schemes1. At around this time other pension funds accrued enormous surpluses and companies helped themselves to portions of the pension funds (8) (9); latterly these same companies have closed their final salary DB schemes on the basis that they were unaffordable. In October 2011, those UK HE institutions which subscribed to USS closed their Final Salary scheme, replacing it with a much cheaper CRB (Career revalued benefits or CARE – career average revalued earnings) scheme.

The Hutton Report (10) , also known as the Pensions Commission, went further with two arguments which were given a high profile in press statements and press coverage. They were (a) that pensioners were living much longer and (b) that Final Salary DB schemes were unfair; “Government should replace the existing final salary pension schemes with a new career average scheme……as I believe this is the fairest way of spreading the effect of change across the generations, and represents the quickest way of ending the in-built bias against those public service employees whose pay stays low over their career, inherent in final salary schemes” (10). The word “fair” appears 126 times in the Hutton Report! However, the provisions of the draft pensions bill are worse than proposed by Hutton, for example the report proposed replacing the final salary principle with CARE but also said that earnings should be indexed by an earnings index not a price index. The effect of that would be to tie pensions to the growth of the 1 In a defined benefit (DB) pension scheme, the future pension payments are guaranteed by the pension sponsor under a ‘covenant’. The sponsor is normally either an employer or in the case of mutual schemes, a group of employers. A good example of a private DB mutual scheme is the Universities Superannuation Scheme (USS), the second largest pension scheme in the UK with assets exceeding £35billion. In these schemes, if one employer goes bust, the other scheme members pick up the scheme liabilities so this means that employers are concerned to ‘de-risk’ the scheme. This concept of covenant and its related concept of ‘last man standing’ does not exist in the case of Defined Contribution (DC) schemes where the risk is at the behest of the individual saver. In a DC scheme, the risk is attached both to the security of the individuals saved contribution (both employee and employer) and to the ‘risk’ of living longer than expected. In a DC scheme, both risks are normally addressed through insurance which makes DC schemes much more expensive, although it is possible in theory to design a DC scheme which provides similar benefits per unit contribution as DB schemes.

economy - pensions would - on the average - be dynamically related to current earnings not to past earnings. As this is written it is not clear exactly how the new state pension will be linked to inflation, currently a so-called ‘triple lock’ is proposed, linking pensions to either inflation (CPI), earnings or …, whichever of the three is the greatest. Linking pensions to earnings has the advantage that it ensures pensions are always affordable in aggregate by linking them ultimately through earnings to gross domestic product (GDP).

Bosses argue that Pensioners live much longer and they can’t afford to pay for themTable 3

The impact of increased life expectancy (Table 3, (11)) is greatly exaggerated and has been eclipsed by the changes in State Pension Age (SPA) and the linking of Pension Scheme’s normal retirement age (NPA) to the SPA, which amount to forcing members enrolled in the USS CRB scheme to work a further five years in order to receive the pension that they would have received if they had remained in the previous Final Salary scheme. The impact is greatest on women who previously expected to retire at 60 and now find their NPA is 65, soon to rise to 67. The new funding arrangements have more than compensated for increased life expectancy, especially when it is considered that many employees are responding to the new economic conditions by working beyond 60 or 65, following the abolition of compulsory retirement.

Bosses argue that Final Salary DB schemes are unfairThe argument goes that those who benefit most from FS DB schemes are the highest paid and that they make a smaller relative contribution to the scheme due to the fact that they tend to be promoted to their high salary positions late in their careers and that therefore their pensions are subsidised by those lower down the scales. However, very many women for example take career breaks for family reasons and tend to be promoted later in their careers, benefiting from the FS structure and losing out from CARE approaches. Other staff progress through a series of scales and then are held for many years at the top of their scale, these staff also lose out if they were on a CARE scheme; in fact in all career models in Higher Education, staff lose out. (12)

It is important to scheme stability in the long term that high earners enrol in the same pension fund as low earners. The NHS scheme is actually redistributive from high earners to low earners and it is not difficult to arrange for final salary schemes to achieve this effect through tiered contributions.

The case that Final Salary DB schemes are unfair has also been thoroughly refuted in a recent TUC document which shows clearly through examples of different sorts of career progression that it is untrue (13) and that the great majority of pensioners benefit from such schemes.

The hypocrisy of this argument by the political class was exposed when the retirement age for women was changed from 60 to 65, depriving women of as much as £15000 pension


Pensions are regulated to death.

“Current accounting standards have been very damaging to defined benefit provision, leading many companies to close their schemes …pension funds are long-term institutions but today’s accounting standards fail to reflect this.”

Lindsay Tomlinson, Chairman, NAPF, March 2010

Two serious threats to defined benefit pension schemes have appeared (i) through the operation of the Pensions Regulator and (ii) through a proposed European Regulation called Solvency II (14). These threats are bolstered by Financial Reporting Standard 17 (15) which enforces the application of the actuarial methods required by (i) and threatened by (ii).

Solvency II applies the accounting standards of for private profit insurance companies to mutual schemes such as USS; it assumes that risk is private and is designed to provide some reassurance to investors in private insurance schemes, as such it is an existential risk to DB schemes and will force them in the direction of DC schemes in which risk is individualised. However, there is significant opposition to Solvency II and it is unlikely to become law in its present form. Nevertheless, it continues to represent a real threat to DB schemes and it must be resisted.

Figure 1 (16)

Ignoring outright theft and corruption (which is not uncommon, for example a past manager of the USS pension fund disappeared with over £1 million of pension funds) three fundamental risks to DB pensions may be defined (1) that pensioners live longer and longer whilst contributors become fewer and fewer; (2) that the value of the pension fund falls, especially relative to inflation so that it can no longer cover its commitments and (3) that its contributors

default. In practice it has been the pensioner who has paid for fund default. For the scheme sponsor (The employer), the risk is that they will be the last man standing and that the company balance sheet will have to cover the loss (The convenant), this undermines investor confidence in the company (Figure 1). The current regulatory environment forces pension funds to measure their future liabilities at a discounted (predicted inflation corrected) current value. The fund is valued at current stock market and gilt values which are very volatile (Figure 2). The result in the case of USS is that its valuation (The difference between its liabilities and its assets) has varied enormously from 103% in 2008 through 74% in 2009, 92% in 2011 and 77% in 2012; these are incomprehensible fluctuations which are likely to be worse in the next valuation. Between March 2011 and March 2012 the scheme valuation changed from a £2.9 billion deficit to a £9.8 billion deficit against a total scheme worth of £28 billion. USS is an immature scheme in which income far exceeds current commitments. A common explanation by commentators is that we are all living longer with the conclusion that current pension levels have become unaffordable. In fact the problems are caused by International Financial Reporting Standards Regulations 2004 (17) as implemented by the UK Pensions regulator. In this regime, pension fund assets are valued at current prices whilst liabilities are assessed at discounted present value (18); neither makes economic sense.

The move from traditional final salary schemes (For example USS up until the rule change imposed in October 2011), which had an element of pay-as-you-go (PAYG) in them, to funded schemes (For example the career average revalued earnings or CARE scheme which replaces the previous final salary scheme for new entrants to USS), has been extremely costly just because of the change of policy. It has meant, in effect, in some cases prefunding pensions. A lot of money has had to be found in order to do this. This is the main reason employers are finding schemes to be too expensive. The PAYG principle - which used to be considered fair enough based on intergenerational solidarity - has suddenly been found to be unacceptable and had to be replaced. Finding the money to do this has been a disaster and led to the closure of many schemes. It is the main reason behind the problems faced by USS.

An outcome of the attempts to ‘de-risk’ pension funds has been a massive transfer from equities (stocks, shares and the like) to bonds (government gilts and other investments with a ‘guaranteed’ rate of return) (Figure 3). There has been a shift in pension fund investment out of equities into bonds as this provides better asset /liability matching under current regulations (Amir et al, 2010). Accounting solvency was hardwired into legislation with the 2004 Pensions Act and this forced firms to move out of real asset investment into financial investments (Greenwood and Vanyos, 2010). Fair value pension accounting has contributed to the closure of defined benefit pension schemes (Kiosse and Peasnell, 2009) and has resulted in increased volatility in Comprehensive Income (Amir et al, 2010). The move into financial assets will increase the cost or pension provision for corporate sponsors.

The regulatory environment can be changed and it is vital that the trade unions campaign for investment smoothing and a regulatory environment favourable to DB schemes. In particular the intergenerational covenant whereby part of the risk associated with pension savings is socialised needs to be restored.

Current policy is moving in the opposite direction, privatising risk to the detriment of everyone except Bankers and some people in the pensions industry.


Figure 2 (19) Maximum and minimum returns over a period of time

Following the Chancellor's announcement in the Autumn Statement (20) the Government issued calls for evidence on: (1) whether schemes should be allowed to smooth DB pension scheme asset and liability values for future actuarial valuations (and, if so, how); and (2) whether the Pensions Regulator should be given a new statutory objective to consider the long-term affordability of deficit recovery plans to sponsoring employers (or whether the Regulator's existing approach, which already recognises the importance of a solvent employer, is enough).

In the Budget delivered on 20 March 2013, the Government announced that: (1) smoothing would not be introduced, but (2) the Regulator will be given a new statutory objective "to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation", with the precise language to be published shortly.

The Pensions Regulator commented:

"In light of the Government's proposal for a new objective to take account of the sustainable growth plans of the sponsoring employer, we will make the changes required, building on the 2004 funding regime, as part of a review of the Code of Practice for defined benefit (DB) funding that we will launch as soon as possible this year.

In addition, we will shortly publish an annual funding statement which will set out our guidance to trustees in the context of current economic circumstances, including the flexibilities available to trustees and company sponsors in the current regime, particularly the freedom to choose the basis on which contribution levels and valuations are calculated." (21).

The introduction of fund smoothing (The computation of present fund value on the basis of a weighted average over a number of years) would greatly ease the pressure on DB pension funds. It is vital that trade unions campaign for this outcome.

Figure 3 Net purchases of equities and bonds by UK pension funds (2001-2010) (22)

Figure 4 Financial assets versus real assets (22)

Why Defined Benefit Schemes are better than Defined Contribution Schemes1. DB pension plans pool “longevity risks”2. DB pension plans can maintain a better diversified portfolio because, unlike individuals, they do not age3. DB pension plans achieve better investment returns because of professional asset management and lower fees.

A key point about the final salary principle (ignored, I think, by Hutton) is that it ensures pensions are always affordable in aggregate by linking them ultimately through earnings to GDP.

4. DB pensions are counter-cyclical whereas DC are pro-cyclical. That is, DB are an automatic stabiliser that helps stimulate the economy in recessions and moderate booms, whereas DC create instability.

5. Final Salary pensions align the incentives of workers with those of the employers in the long run and by doing so promote economic growth.

6. DB schemes promote social welfare. There is an argument that DB are better for society as a whole, ignoring distributional issues.


Key Differences in How Investing Occurs in DB Plans vs DC Plans: In DB plans, a common trust is established and assets are invested by professionals. In DC plans, individuals typically direct their own investments; Age-related move to “safer,” but lower-yielding investments as individuals age and individuals generally achieve lower returns as compared with professionals. As a result, the cost of a DB plan is almost half the cost of a DC plan (23).

All-in costs savings in DB plans 46%

1. Longevity risk pooling saves 15%

2. Maintenance of portfolio diversification saves 5%

3. Superior investment returns save 26%

Because of these efficiencies, the DB plan can provide the same benefit at about half the cost of the DC plan.

Mutual schemes versus private schemes

Fifteen years ago Guardian Money reader Michael Rundell started saving in a pension scheme with Scottish Life. In September 1994, the FTSE 100 was just above 3000. He paid into the plan every month, investing £70,000 in total. This month, with the FTSE above 5000, he asked Scottish Life for the value of his fund. He was stunned by the reply. Despite the share index rising some 60% over the period, Scottish Life had turned the £70,000 into ... just under £70,000.

"What a splendid wheeze this pension business is," says Rundell. "There was me thinking the fund was a mechanism for maximising my retirement income, when it's really a job-creation scheme for people who – judging by their performance as fund managers – would be otherwise unemployable. Would someone explain how it can be legal for these people to make a good living out of my savings while doing absolutely nothing for me?"

Rundell is hardly alone and, sadly, the performance of Scottish Life isn't much different to other investment management groups (24)

A clear indication of where the detractors of DB schemes are coming from is shown by their failure to point to the performance of private pension schemes such as that in the quote from the Guardian above.

Pensions management fees are far too high

The system of occupational and private pensions in the UK is not fit for purpose. It is not the low cost, trustworthy system which savers justly demand.

It needs reform. In the UK, the state pension is the lowest relative to income of any OECD country. We therefore depend on private provision. Yet only 50% of employees currently contribute to a private pension.

For those who do save, the current system is poor. Indeed, if a typical British and a typical Dutch person save exactly the same amount for their retirement, the Dutch person will end up with a 50% larger pension.

British savers are often unaware of how costly pensions can be. Our research shows that people who are sold pensions at a charge of 1.5% per annum, do not realise that over the lifetime of a pension, this will result in 38% of their possible income being lost to fees. (25)

A pension management fee of 1.5% amounts to 38% of the final pension. This is because the fee is charged annually and is compounded because it is removed annually from the pension fund, reducing the investment. (26). The impact of management fees on UK pensions is dramatically shown in the quote above.

Why employers’ do pensionsThe four “R”s: recruitment, retention, return, retirement (13).

RecruitmentThe existence of a good quality pension scheme has proved valuable in giving employers a competitive edge when facing a tightening labour market or when dealing with skill shortages. Employees may be more focussed on pay and job prospects when deciding to move to a new position. But the existence of a decent pension scheme adds to the good reputation of an employer, and many trade unions would see decent pension provision as a significant benefit they would look to an employer to provide. Contemporary studies of the top employers to work for look specifically at pensions as a key benefit for employees. (13)

Retention and returnWhile it may not be the case that membership of a pension scheme is a prime factor in motivating employees to stay with an employer or to return after a break, it has certainly been a factor in particular for employees in public service pension schemes. Final salary schemes in particular incorporated a compelling reason to ‘stay’ rather than ‘go’. Consider a member who currently earns £24,000 but expects two significant promotions over their career. In a final salary scheme, the pension at the end of their career is significantly higher than what they would earn if just before the promotion they changed jobs even if the employers all ran the same final salary scheme Of course, promotion opportunities may not be available if they stayed with the same employer, meaning benefits would be lower. (13)

The need to stay with an employer to enjoy the full benefit of a final salary scheme was lessened somewhat by the introduction of statutory revaluation of pensions in 1986. Before then, on leaving an employer, a pension was generally ‘frozen’ with no increases made to reflect the falling value of money in the period from leaving the scheme up until retirement.

Whilst staff retention and return is an employer objective in using pension schemes, it can act as a barrier to employee mobility. This is a problem for the economy as a whole and indeed for employees themselves. Trade unions have often argued that these barriers should be removed by the requirement for a mechanism to allow members to move between schemes without suffering the kinds of benefit reduction illustrated above. Indeed in the public sector, there is such a mechanism, known as the Public Sector Transfer Club of which USS is a member. (13)

RedundancyTypically, people tend to focus on the recruitment advantages of running pension schemes for employers. But at least as important in recent years are the flexibilities a pension scheme gives an employer to help manage workforce change. This is covered here under the generic term ‘redundancy’ but includes a number of ways of offering employees incentives to leave. (13).

Fungibility of assetsEmployers can use pension funds to invest in their own operations, lowering the cost of capital investment in their own company, thereby increasing profitability.


Economically efficientPension funds can be an economically efficient way of (a) Pooling risks (including longevity); (b) Lowering expenses and (c) providing an unconstrained investment policy. (13)

The State PensionHere I quote extensively from National Pensioners Convention Documents

Table 4 (27)

State pension (basic and second) as a proportion of average working pay

Luxembourg 88.3%Netherlands 81.9%Spain 81.2%Denmark 79.8%Italy 67.9%Sweden 62.1%

Average for the EU 60%France 51.2%Germany 39.9%Estonia 32.9%Ireland 32.5%UK 30.8%

National Pensioners Convention viewOn 14 January 2013 the government published a White Paper on the future of the state pension. Essentially, the proposals will combine the basic and second state pensions for anyone who retires after April 2017. People will also have to pay more National Insurance and work longer before they can draw their pension in retirement. Contracting out of the state second pension will end and private sector employers will be able to unilaterally alter the terms of their pension schemes to force their employees to either pay more or get less pension. And anyone who has already retired is excluded from the plans.. The NPC is opposed to the White Paper and is currently considering how best to campaign against it (27).

Much of the rationale behind the White Paper is based on a number of flawed assumptions. Contrary to the government’s view, the complexity of the current state pension system is less of a barrier to saving than the lack of spare capital which individuals can put aside for their retirement and the risks associated with defined contribution occupational pensions which are wholly reliant on the performance of the financial market. Life expectancy projections and the capability to continue working well beyond 65 have also been grossly over exaggerated, and bear little relation to actual experience. Therefore, if the UK’s pension system really is at a crossroads, these proposals are destined to take us in the wrong direction. (28)

Summary of proposals (28)

1. Introducing a single-tier state pension From April 2017 (at the earliest), those with a minimum of 35 years of National Insurance contributions will receive a state pension of at least £144 a week (at today’s prices and estimated to be around £160 by 2017). For these retirees the current basic and second state pensions (State Second Pension S2P) will no longer exist.

Those who retire after April 2017 will have a combination of the existing state pension system and the new one as proposed in the White Paper. Many will have already built up an entitlement to more than £144 a week, and they will still receive this higher amount. However, those who start work and begin making National Insurance contributions after the new pension comes into force will only be able to build up entitlement to £144 a week.

To receive a full state pension under the new system an individual will be required to have paid National Insurance for 35 years. Anything less than that will give a pension on a pro rata basis. Those with less than around 10 years National Insurance contributions will not receive any pension.

2. The effect on existing pensioners Anyone who has already drawn their state pension prior to April 2017 will not be included by the new proposals. Whilst there will be a number of existing pensioners who receive more than £144 a week through their basic and second state pensions (such as SERPS), many older women in particular do not.

Those pensioners in opted out schemes such as the Universities Superannuation Scheme (USS) and the Teachers Pensions Scheme (TPS) do not receive a second state pension in any case. (29)

After April 2017 the first £144 of the state pension will be uprated annually in line with at least earnings (although the White Paper assumes a ‘triple lock’ of the higher of earnings, prices or 2.5%), and anything above that figure will be linked to the Consumer Price Index (CPI). It is unclear at the moment whether an existing pensioner would (on today’s prices) have an earnings or ‘triple lock’ link on the first £107 and a CPI link on any state second pension above that level or whether they too will have the same arrangement as those under the new scheme.

3. The future of means-testing Those currently in receipt of means-tested Pension Credit will continue to do so after the new system comes into force. Likewise, it is assumed that anyone retiring after April 2017 that doesn’t get a state pension of £144 a week will also be entitled to a means-tested top-up (but the exact details of this are unclear).

Under the new scheme, Savings Credit will be abolished and for those who would have previously been entitled to Housing and Council Tax benefit, there will be a five year transitional arrangement to allow them to get extra help with these costs. However, the details of this have yet to be published.

4. The cost of the new pension Those who retire after April 2010 have needed 30 years of National Insurance contributions to entitle them to a full state pension. Under the new scheme, individuals will need 35 years to qualify for a full pension.

The White Paper shows that as a percentage of Gross Domestic Product (GDP), by 2060 the new scheme will cost 0.4% less than if the existing system were left unchanged.

The government has made it clear that there is no new money going into the state pension system under these proposals. In fact, the Institute for Fiscal Studies predicts that the reform is actually likely to net the Treasury an annual windfall of at least £9.2bn in extra National Insurance contributions from employers.

5. The impact on occupational pension schemes As the state second pension is being abolished and merged with the basic state pension, employees in defined benefit (final salary) occupational pension schemes in both the public and private sector will no longer be able to contract-out of paying full National Insurance. After April 2017, employees will be expected to pay an additional 1.4% and their employers 3.4% in National Insurance.

The White Paper recognises that some employers may wish to make changes to their pension schemes as a way of off-setting the requirement to pay the additional National Insurance contributions. The government proposes to therefore give private sector employers powers for a five year period to change scheme rules without the consent of


the scheme’s trustees. This will mean either reducing future pension rates or increasing employee contributions. In the public sector, the employer will not be able to pass on the cost of their additional 3.4% contributions through reductions in future pension rates or increased employee contributions – but will still be expected by the Treasury to fund the extra costs through other measures (eg. wage freezes or reductions in staffing).

6. The State Pension Age Legislation is already in place to raise the state pension age for men and women to 65 by 2018, 66 by 2020 and 67 by 2028. In addition, the White Paper proposes a review of the retirement age every five years, with the first report coming out no later than May 2017.

Women are more likely than men to use many services facing cuts or being scaled back, including further and higher education. On pensions the government’s announcement to speed up the timeframe of equalisation of women’s retirement age with men’s will have a disproportional impact on women. Women face up to £15,000 in lost income as a result of the changes. Women are already at greater disadvantage with regard to state pensions and are more likely than men to face pensioner poverty (30).

The impact on women’s work based pensions was also examined. The TUC predicted that the decision to up rate pensions according to the CPI measure of inflation rather than RPI measure of inflation, significantly reduce their value to members over time as CPI tends to be lowered than RPI. The call is for a focus on taxes rather than cuts to bring down the deficit, as taxes can be raised in a way that does not disadvantage the poorest in society and has a less gendered impact.

What’s wrong with the White Paper? Whilst it has been hailed as a radical reform of the UK state pension system, it has failed to address the current injustices and unfairness experienced by existing pensioners. In particular, the current basic state pension remains completely inadequate – as demonstrated by the need to provide additional support through the means-tested Pension Credit. The White Paper will not put a single additional penny into the pockets of existing pensioners despite 1 in 5 older people still living below the official poverty level. Even £144 is still over £30 a week less than the poverty level for older people (£178 a week before housing costs in 2012).

The introduction of a cut-off date in April 2017 for the new pension scheme will create a two-tier system. As a result, some will be getting simplified state pensions whilst others will be left to claim complicated means-tested benefits. Already millions of existing pensioners have missed out on the reduction in National Insurance which now only requires 30 years of contributions to get a full state pension, whereas many of them retired when the rules were 39 years for a woman and 44 for a man. Perpetuating such differences in the pension schemes across different generations of pensioners is simply unfair.

Despite recognising that the means-tested Pension Credit is ineffective, the government is prepared to maintain it for existing pensioners for at least another 60 years and sees no contradiction in continuing with a benefit that 1.8m people don’t claim, despite being entitled to do so.

Future pensioners will be asked to pay five years extra National Insurance contributions, get a state pension than is less than they could earn under the current system and be forced to work longer before they can draw it.

Those with defined benefit (final salary) occupational pensions in the private sector will have the terms of their scheme unilaterally changed – which could lead to either lower pensions in retirement or higher contributions from salary. This could signal the end of the final salary pension scheme in the private sector altogether. Whilst those in the public sector will not be affected in this way, employers will still be looking to find other means of off-setting the extra 3.4% National Insurance contributions they will have to pay. This could be potentially be through wage freezes or job cuts. According to the Institute for Fiscal Studies (IFS), most people born after 1970 could expect to receive

less from the state pension. The IFS said: “It is important to be clear that – while there will be a fairly complex pattern of winners and losers from the reform in the short term – the main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups, most notably the self-employed”.

Anyone who has already accrued a combined basic and second state pension (S2P) of more than £144 a week will, after 2017 still have to contribute additional National Insurance of 1.4% until they retire without any chance of building up additional S2P as a result.

The White Paper proposes automatically linking the state pension age to life expectancy, without any acknowledgement that longevity is affected by profession, income, region and other factors. Whilst as a society we are able to keep people alive for longer now, that does not in itself mean that people are able to work longer. In addition, there are serious concerns as to the health of future generations and the urgent need to enable younger people into the workplace. None of this can therefore be addressed by simply raising the retirement age. (28)

What to do? An alternative pensions strategy

Reform is needed. In this report, we outline how the UK has ended up in such a poor position, and the key questions which pension policy makers now need to address.

We also describe what an effective pensions architecture would look like. Building on the positive but partial reforms which are currently in place, Britain should aim for a low cost system of occupational pensions, based on auto-enrolment, and a limited number of suppliers whose scale allows them to offer low costs. Pension savings should be aggregated in a way which will give adequate returns; that suggests collective provision and trustee governance. And those charged with investing our money should do so responsibly; as trustworthy agents of those whose money they invest.

Few dispute these conclusions. Indeed most of the characteristics we suggest can be found in the pension systems of other countries, notably Denmark and Holland. Both are recognised as having one of the most effective pension provisions, and the lowest levels of pensioner poverty in the world. Few experts dispute the overall framework which the RSA advocates.

For this reason, we conclude that the answer to Britain’s inadequate pensions is not just a technical one. It is also a political one. No single agent can create effective occupational pensions. It requires all stakeholders to work together; politicians of all political persuasions; regulators and policy makers; representatives both of employees and employers; advisors, actuaries, academics and think tanks; industry groups and pension providers. (25)

We need to:

Support the National Pensioners Convention demand for a decent state pension. Demand a regulatory environment which allows investment smoothing and is supportive of DB schemes. Insist that NEST is run as, or equivalent to a DB scheme with at least a 35:65 ratio of employee to employer

contribution. Establish negotiating objectives where pension schemes have been converted from DB FS schemes to CARE

schemes the FS and CARE schemes for convergence in order to prevent closure of the FS scheme.


No to divide and rule, we need a single labour movement campaign for improvement in the State Pension and defence of existing DB schemes.

Changes to USSIt is clear that those employers who contribute to the USS scheme jumped the gun by imposing the changes in October 2011, making detrimental changes which were more draconian than those proposed in the Government’s Heads of Agreement proposals (31).

Table 5

Comparing USS and TPS (32) (31) (33)

USS CRB NHS Teachers’ Civil Service Local Government

Normal Pension Age

SPA SPA SPA SPA SPA

Basic design CARE CARE CARE CARE CARERevaluation CPI CPI + 1.5% CPI + 1.6% CPI CPIAccrual rate 1/80th 1/54th 1/57th 1/43rd 1/49thMember contributions (future service)

6.35% 5% to 14.5% 6.4% to 8.8% 4.6% to 9% 5.5% to 12.5%

Employer contribution

16% (35:65 employee:employer)

12.1% 14.1% 16% nominal 12.1%

Indexation of pensions paid

CPI capped CPI CPI CPI CPI

Lump sum 3/80ths commutable

Implementation 1st October 2011

1 April 2015 1 April 2015 1 April 2015 1 April 2014’ 6

The Current UCU Negotiating PositionUCU pension negotiators are hoping that the comparatively greatly inferior terms (Table 5) of the current USS CARE scheme will force employers through job market forces to make an improved offer. However, given that the negotiators have foresworn industrial action the employers have little reason to negotiate and market forces can cut both ways. For example, Post-92 employers might want to use USS CRB for new entrants because it is cheaper, rather than pre-92 employers wanting to improve USS because of competition from TPS; therefore pressure from employers in pre-92 HE institutions may not be as great as the majority of UCU negotiators hope. A document (UCUHE/191), to be presented to the HE conference at May 2013 congress by the UCU superannuation working group (SWG) and supported by a majority of the Higher Education Committee who are members of USS, attempts to blame the decision of the June 2012 Special Sector conference to continue industrial action for the union’s current weak bargaining position. For this reason alone it should be rejected since it is clear that without the threat of industrial action the employers had and continue to have little reason to negotiate with us seriously.

Whilst the negotiating objectives set out in UCUHE/191 should be strongly supported, especially the proposal to close the gap between the Final Salary and CARE schemes, they go nowhere near far enough to match the challenges raised by the dramatic changes in the pensions environment begun by the last Labour government between 2004 and 2008 and continued under the current ConDem government. These changes threaten the viability of the USS

scheme, even in its altered form whilst the viability of the TPS scheme depends very much on future actions of teachers and other public sector trade unions. In the next section an alternative strategy is outlined which addresses these issues.

An alternative Trade Union strategy on pensionsThe UCU needs to make common cause with those trade unions still currently in dispute over pensions. These include the NUT, the FBU and the CWU. The UCU also missed an opportunity to work with Pension Professionals such as Con Keating (34) who put forward powerful arguments in favour of Defined Benefit schemes, undermining the current consensus on a move to Defined Contribution Schemes. Regardless of whether our members are in TPS, USS or another pension scheme we need to campaign hard for the regulatory changes needed to protect DB schemes from market volatility (Figure 2). We need to change the TUC’s current support for what Berry and Stanley call ‘the third consensus’ (3) and instead support the demands of the National Pensioners Convention campaign for a decent state pension (27). We need to strongly put the case for DB pensions (See Page 10, Why Defined Benefit Schemes are better than Defined Contribution Schemes), both to our members and the public in general.

In the conclusion to their document written for the TUC entitled “Third Time Lucky” Berry and Stanley welcome the move to auto-enrolment and the restoration of the link between pensions and earnings proposed in the draft pensions bill, as recommended by the Pensions Commission (35). Unfortunately they ignore all the other aspects of pension reform, beginning with the changes in state pension age enacted by the last Labour Government in 2008, which dramatically undermine any benefits which might accrue. Even Berry and Stanley recognise serious problems with regard to the proposed low level of contributions and the dominance of employers and pension providers in pensions provision. They go on to say in their conclusion that “ … even the better structures in the third consensus run the risk of a race to the statutory bottom. Employers could discharge their obligations with relatively limited fuss, by handing over control of their workplace pension schemes to providers such as insurance companies, offering products with limited cost and administrative complexity to the employer, but higher costs and fewer safeguards for the actual savers and keeping contributions at the current minimum levels in perpetuity.”

It is vital that the Labour Movement returns to the principle of socialising the risk to workers’ pensions. The move to Defined Contribution pensions is undermining the intergenerational covenant, threatening to leave entire generations without pensions and creating a division in society which threatens existing pensioners.

Finally UCU pension negotiators must recognise that pensions are deferred wages and that the campaign for decent pensions is part of the fight for decent wages. This means that the general political struggle against the austerity consensus and a united fight in defence of pay levels with both public and private sector unions should be our priority. There are some encouraging signs that Trade Unionists are waking up to the disaster that the ConDems are preparing for working people in the United Kingdom. For example UNISON has recommended (May 23, 2013) that its members reject the most recent pay ‘offer’ in Higher Education.

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