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View the article online at http://citywire.co.uk/money/article/a594414

BBC pension victory sounds wrong note for workers

The BBC has won a High Court battle over its plans to cap the amount of pensionable income that can be taken from future pay increases.

 

by Michelle McGagh on Jun 07, 2012 at 15:52

In the public sector the outlook isn’t much brighter. The London School of Economics has estimated that the public sector deficit stands at £1.3 trillion.

The strain on UK pensions has led many companies to close their final salary schemes in favour of defined contribution or career-average scheme which cost less for the employer. The first is calculated on the contributions that you make and the outcome from the latter is calculated as an average of the salary that you earned in your life at the company rather than on the final salary you have at retirement.

Omen for the future?

Charles Cowling, managing director of JLT Pension Capital Strategies, said capping of pensionable pay increases has been happening for a while but never with such a high profile as the BBC court case.

Those who are lucky enough to remain in a final salary scheme that is not closed to future accruals are likely to see some changes to the way their pension is run, either through the introduction of a cap or a move to a career-average scheme as companies try to contain the cost.

Cowling said that at the moment capping pensionable income is done but limited as companies are more likely to close the DB completely to future accruals.

‘I think the likelihood is we will see less [capping] because the private sector is already closing DB schemes to future accruals and moving to DC schemes, so the liabilities are not affected,’ he said.

‘We will see more schemes closing completely. The other way which is very popular is switching to a career average scheme where you pension is based on an average salary throughout your career which means that if you have a big pay rise the increase affects a smaller bit of your pension rather than the whole lot.

‘Moving to career average and capping pensionable income are ways companies are reducing their expenses but the whole provision of DB [defined benefit] in the private sector is rapidly falling,’ said Cowling.

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16 comments so far. Why not have your say?

Antonio VIvaldi

Jun 07, 2012 at 17:04

This story is so wrong. The judge has not yet issued an order. The crucial fact in his opinion (issued two weeks ago) was that in fact the BBC had no right to designate only part of a pay rise as pensionable. You should read the judgement. Then you would learn something.

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Alasdair Lawrance

Jun 07, 2012 at 17:24

With employers now racing to the bottom in pension schemes, will someone please tell me how we're supposed to finance staying in a care/nursing home?

Also why is people living longer such a problem? The pensioner still has that nominal capital in the fund and with the whizz-o fund managers we keep hearing about, surely it's not that difficult just to keep up with inflation increases?

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Jon

Jun 07, 2012 at 18:50

Alasdair - not sure I understand your logic. Yes, it would be hoped that the fund managers can match inflation, which would mean that a pension could also be increased to match inflation, but if the pension has to last many more years then clearly only a smaller pension can be afforded, or the fund has to find cash from somewhere else - eg capping the payouts, reducing other benefits, askingfor higher contributions....... life expctancy has meant that retirement years have doubled over the last 25 years, so the extra cost is very very considerable.

So this factor is a real problem. If you are close to retirement with a private pension, and have been looking at your projected pension each year then you will appreciate this more !

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Alasdair Lawrance

Jun 07, 2012 at 19:20

I'll try to clarify. Not all public sector funds are PAYG by any means, that is, fewer and fewer contributors paying pensions to more and more longer lived pensioners. Those pensioners contributed in their working life to the fund, and that's the nominal capital I'm talking about, which incidentally stays in the fund, and isn't added to the pensioners estate on death. Just because private pensions for most people are such a rip-off, doesn't mean you should

inflict them on us all. Just wait for the NEST debacle to unfold!

Note also that it's declared Tory-led Co-alition policy to privatise/outsource all public services, thus reducing the number of contributors quite drastically. So don't, whatever else you do, blame public sector workers for the pensions f**k-up.

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exiled yorkshireman

Jun 07, 2012 at 20:15

What ever the financial arguments (and I'm afraid to say most public sector workers seem to believe in fairies) the really sad fact is that although on average people are living longer I see a great many living a living death as their body and minds decline but the NHS valiantly keeps them alive in an endless bed-chair-bed routine. The really saddest thing is that most young workers will now have to work well into their 70's before they will be able to draw any pension, by which time they may only have a relatively few years of reasonably good health and fitness left - realistically I'm not sure if they really stand to gain anything. Until a cure is found for dementia and other age related decrepitude the future looks pretty bleak in my view. Sorry to be negative.

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Moylando

Jun 07, 2012 at 21:09

Alasdair -

You ask how you are supposed to finance living in a care home. Try using your own money not mine or my grandchidrens - or make do with a local authority place

You talk about pensioners contributing in their working life to the "fund". You really haven't got the fact that with people living longer the "fund" wasn't enough. Its straightforward enough - the country hasn't got the money to meet the bill - which has turned out to be much bigger than expected so we all have to offer to do the washing up

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Reckoner

Jun 07, 2012 at 23:09

Alasdair is right my dears: the age of getting more out than you pay in and expecting someone else to pick up the tab are over, for most of us at least. Deal with it. Talk of the "race to the bottom" as coined by some of the big public service unions is a red herring - essentially meaningless. This nasty little financial reality may not apply to the top 1% but thats another story.

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Ladysaver

Jun 08, 2012 at 01:18

How will people afford a care home? Save up for it. I was taught to save up for anything I wanted or needed and not to begin to think of buying it before I'd saved enough to do so. I've saved for years and years for a pension, sometimes going without other things to do so. I've never expected anyone else to pay for me in old age and neither did my parents. Get used to it.

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John Osborne

Jun 08, 2012 at 10:31

This does raise various issues that have had a bearing on all these schemes

- regulation of Pension Schemes possibly encouraging a blinkered view

- the competance of Pension Fund trustees

- fees levied by the funds the trustees use, particularly "absolute return" funds

- government taxation (e.g.Gordon Brown's raid in 1997)

- government legislation (e.g. allowing pension holidays and excess funds back to Companies)

- over-borrowing by previous governments leading to general rise in taxation

- the "matching assets" philosophy

I believe all these together at various times have had a very negative effect on most pension schemes and we should at look at these for reasons for the pension deficits, despite the often more than adequate contributions.

I see no reason why it should not be possible to make a long-term model of a pension fund that keeps an adequate amount of capital up with inflation whilst paying pensions from income.

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Alasdair Lawrance

Jun 08, 2012 at 11:38

Ladysaver -

The average wage here in the Midlands is around £25,000pa. Please tell me, in detail, how we're expected to save for nursing home fees of £2,000 - £2,500 every 4 weeks, say £30,000 pa?

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Moylando

Jun 08, 2012 at 12:16

Alasdair,

Given those circumstances i suggest that you lower your expectations - or are you suggesting that others pay for a nursing home at £30,000 pa. Who?

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Alasdair Lawrance

Jun 08, 2012 at 13:15

That seems to be about the going rate. Local Authorities pay less because they get 'discount for bulk', so individuals have to make up the excessive returns on capital that these chains demand. You remember Southern Cross?

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PensionsManager

Jun 08, 2012 at 13:47

Marking to market has a lot to answer for. This is the process of measuring assets and liabilities on any given day with what the 'market price' is. It is not really relevant for a long term institution such as a pension fund or social security scheme. Real intrinsic value is impossible to measure as it is subjective and an emotional judgement by the individual.

Scare stories abound, as they always do, which unfortunately leads to perverse behaviour.

When interest rates return to normality and capital can deliver sensible returns the temporary deficits will be history. Government has gradually diluted the worst excesses of inflation protection (dreamed up in the late 1970s+ when inflation was out of control) and the safety valves are returning making Defined Benefit schemes more sustainable for the future, if you take a long term pragmatic view, that is.

www.pensionsmanager.blogspot.co.uk

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Colston Hicks

Jun 10, 2012 at 22:27

Pensions Manager

Marking to market is relevant for a long term institution such as a pension fund as it is carried out every year without fail by competent actuaries.

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Westwinds3

Jun 11, 2012 at 08:14

I suggest Pensions Manager is largely correct, and Colston Hicks' faith in competent actuaries misplaced. I was a Pension fund trustee for 16 years during which time "competent actuaries" went from all agreeing pension funds had far too much money to all agreeing that it would be impossible to fund decent pensions for all.

Jeremy Grantham wrote about pensions on page 12 his Summer 2010 letter

"A Time-out on Pension Logic

This is a good opportunity to make some points on pensions. The only way that pensions can be paid is out of the current year’s GDP – the total output of new goods and new services. You cannot materially move resources to pay pensioners through time. Sure, you can store a few tins of beef and carrots in the basement. This is indeed preparing for the future, but it is by its very nature a rounding error in total scale. I suppose you could build an extra supply of houses, more than you currently need, in order to prepay future bills, but empty houses have a poor return on investment and deteriorate, as we are finding out now, for completely different reasons. No. Every bus ride, every full grocery bag, every TV set, and every doctor’s visit for a pensioner comes out of this year’s GDP pie just as it does for a young worker. All that accumulated financial wealth does is shuffle the accounting claims to determine the pecking order: in the end, everyone needs to derive a life-support system from the current GDP. In this sense, a pay-as-you go pension fund like Germany’s is merely admitting the obvious. When you have an aging population mix, more of the current year’s GDP pie will be eaten by retirees and less by younger workers, and nothing you do can materially change this fact."

(registration needed, www.gmo.com, library, Grantham letters, Summer Essays)

Your pension depends both on what you contribute and what the economy is like when you retire. It doesn't matter how much you put in today. Unless your contributions create a better economy tomorrow, you will be poor when you retire. As trustees, it was continually hammered home to us that our "fiduciary duty" was to make things worse - to invest outside the UK, to ramp up the price of commodities, to promote over-leveraged buyouts etc. etc.. Nothing to promote an economy and society that could support our pensioners.

I read everywhere the universal "truth" that pay-as-you-go pensions are bad and funded pensions are good, (but of course we all must contribute more). Both are buying a stake in the future. One provides an interest-free loan to the Government to provide essential services today. Governments can waste money or spend it wisely, but in general, it goes straight to where it was meant. Alternatively, one can use the financial services industry to invest in the private sector. Before deciding this is more efficient, you need to read Pete Comley (http://monkeywithapin.com/). He reckons that the private investor pays 6% a year to the industry. At first sight, our pension fund was far more efficient, paying only a fraction of a percent of its assets for management. But if you set the costs of holding and managing a large pool of assets against the cost of the actual pensions being paid, the true cost each year is probably 10%.

Things are not necessarily what they seem.

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Colston Hicks

Jun 11, 2012 at 11:34

Westwinds3

I did not say that actuaries were actually competent from 1973 to 1997. They failed together with other economists.

I stated that the principle,' marking to market' is sound.

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