Politicians have a bad habit of tinkering with pensions for short-term gain, but perhaps we can’t really blame them.
The original concept of a defined benefit scheme recognised that people who died earlier than expected would get a worse deal than those who lived longer. No one minded that though, since they were generally just as likely to win as to lose in that bargain, and it was a good system overall.
However, society has gradually moved towards a greater sense of individual entitlement, and many people now resent anyone else extracting any benefit from their pot.
There are cheap votes available for any party prepared to pander to populism and ignore the objective truth
Even the state pension is now seen as a personal entitlement that should be paid over an ever-longer retirement, irrespective of the recipient’s wealth, with annual increases in real terms.
The demographic time-bomb facing the UK as our population ages makes this a dangerous position.
Pension costs will escalate alongside health and social care expenses, to overburden the falling number of workers.
Nevertheless, voters will still punish any politician who threatens the triple lock or raises the state pension age, even when they do so based on expert evidence.
Employers’ DB strain
DB schemes in the private sector provide pensions for some 11 million people in the UK and give a huge amount of protection.
The pension scheme holds money separately from the company’s assets for added security, and the company is strictly limited in taking any money out.
Employers also have to pay substantial contributions to fund benefits for past as well as current employees.
Some of those benefits are far higher than was originally intended, with legislation requiring the index-linking of pensions both before and after retirement.
When people live longer and interest rates are lower than expected, employers have to pay even more.
If a company goes bust without enough money in its scheme, the Pension Protection Fund steps in to make sure the members don’t lose out too much. This lifeboat scheme is itself funded by employers, like an insurance premium.
Good deal goes unrecognised
Ultimately, members typically get three times as much out as they put into a DB scheme, paid for by the sponsor.
Despite this, the prevailing political rhetoric still demonises employers. There are cheap votes available for any party prepared to pander to populism and ignore the objective truth.
Pension policy should be a long-term strategy for the public good, but the public themselves prefer policy soundbites over sound policy.
Hugh Nolan is president of the Society of Pension Professionals
