MPs must not let DB schemes break their promises

The implication was that once given, these benefits could never be taken away.

We learned the truth of that when schemes collapsed leading to a long fight with the then Labour government to gain compensation.

Out of that came the Pension Protection Fund.

A decade on and Frank Field, chair of the work and pensions select committee, describes defined benefit schemes as offering unsustainable promises which are being stacked against the jobs of younger generations.

“The impact on millions of people’s living standards from intergenerational trade-offs of income and wealth are brutal,” he said. Strong words indeed.

Defined benefit pensions in the private sector are an anachronism. But it remains the duty of MPs to make sure that promises made are promises kept. Tony Hazell

Field has launched an inquiry into defined benefit pensions to find “radical solutions” to the increasing pressures posed by rising life expectancy and lower investment returns.

Field is, of course, the man who was told to think the unthinkable in 1997 and was promptly put out to pasture for doing so.

But there are reasons for private sector defined benefit scheme members to be very concerned.

The government has already said it is considering changing the law to allow the British Steel Pension scheme to tie its annual increases to the consumer price index rather than the usually higher retail prices index.

As has been pointed out, such a change could open the floodgates to requests from other pension trustees.

Around 11m people benefit from 6,000 private sector defined benefit pension schemes, but most have been running deficits for years.

Gordon Brown’s dividend tax credit raid did enormous damage, but so have accounting changes which forced more conservative investment policies, Ken Clarke’s threat while chancellor to penalise schemes with large surpluses, which led to employers taking payment holiday, low interest rates and a slow stock market.

Nevertheless, these schemes formed part of the employment contract. While many are now closed, their members are relying on them to provide a retirement income.

Indeed, their whole retirement investment strategy may well be based around the security delivered by that final salary pension.

If MPs’ pension schemes are messed up then it is taxpayers who foot the bill, but when MPs mess with private pensions, it is invariably ordinary working people who bear the brunt.

Defined benefit pensions in the private sector are an anachronism. But it remains the duty of MPs to make sure that promises made are promises kept.

***

If the cap doesn’t fit... tough

When George Osborne announced pension freedoms in his 2014 Budget, he made his intentions clear.

In the Freedom and Choice in Pensions consultation document published in July 2014, his signed foreword said: “Individuals who have worked hard and saved responsibly throughout their adult life should be trusted to make their own decisions with their pension savings.”

The document went on to say: “The government is keen to ensure that individuals are not prevented from accessing their pension savings flexibly under the new system.”

Some in the industry were not listening. The 1 per cent exit charge cap has not been greeted well by some.

I’ve seen complaints that they are a vital part of the fee structure. Well, if the fees had not been structured in such a complex way in the first place, then perhaps you wouldn’t be in such a muddle today.

Some have suggested that exit fees prevent the frivolous from accessing their money early.

Well, here’s some news. Someone who is frivolous at age 57 is not likely to change by the time they are 60 or 65.

In fact, research has shown that most people are generally taking modest amounts from their pensions.

The fact is that the industry has saddled itself with this mandated cap because some were too arrogant or too greedy to make the reforms that consumers demanded and the government made clear were inevitable.

****

At a loss for words

Communication is key to good customer service. So what do you make of this sentence in a letter sent to my 88-year-old mother-in-law from her investment manager?

“Structured products are an investment on a particular index in this case, the FTSE 100, whereby your cash is deposited on a discounted cash flow basis usually over six years.” (The questionable punctuation is theirs.)

What, precisely, is she supposed to glean from this?

We’ll leave aside the issue of an 88-year-old being put into a six-year investment. That’s something I’m dealing with privately.

But what I can say is that I will be communicating with them in rather plainer language than they have used when communicating with my mother-in-law.