Pension warning as Britain told to act now or see £750 BILLION added to national debt
- IMF predicted national debt could spiral to 135% of national income by 2050 if the average lifespan in the UK rose by just three years more than predicted
By HUGO DUNCAN
PUBLISHED: 00:19 GMT, 12 April 2012 British workers should be forced to delay their retirements now or see £750billion added to the national debt, the International Monetary Fund warned yesterday.
It said the country faced financial ruin if the average lifespan in the UK rose by just three years more than predicted.
The organisation warned that if that happened, £750billion would be added to the national debt by 2050 to pay for the increased cost of pensions and healthcare.
The £54bn pensions ‘ticking time bomb’
Britain is sitting on ‘a ticking time bomb’ created by the generous pensions enjoyed by council workers, a report warns today.
The shocking analysis reveals councils across the UK have a pensions deficit of £54billion – amid warnings it could get even bigger.
Experts warn council tax bills will have to rise sharply in the future to pay for pensions paid to council workers, from bin men to town hall staff.
Shell axes final salary pension schemes
SHELL is to scrap final salary pensions from 2013 — despite making billions in profits.
The oil giant will close its scheme to new recruits in two years.All existing staff will be kept on final salary benefits — for now. The move means that every UK company in the FTSE 100 has now scrapped the generous retirement packages. It came as the UNITE union revealed thousands of health workers had “unanimously rejected” government calls to cough up more money for their own saving pots.
Matthew Sinclair at the TAXPAYERS ALLIANCE said Shell’s action showed a huge divide between the public and private sector. While the Government is £990 billion in debt, Shell is expected to post annual profits of almost £17billion for 2011.
Mr Sinclair told Sun City: “As the population ages, everyone is having to be realistic about the costs of providing for so many pensioners.
“Taxpayers shouldn’t be asked to pick up the bill for pensions far more generous than they enjoy themselves. “And unions need to give up on futile strikes against modest steps to improve the situation.”
Shell — famed for its slogan “You Can Be Sure of Shell” — told staff the pension change reflected UK “market trends”, such as rising life expectancy and poor stock market returns. It said in a statement: “The plan will be designed to ensure that the reward package in the UK for new hires remains strongly competitive.”
Other major British companies such as TESCO, DIAGEOand BP have all recently closed their final salary pension schemes — which base retirement pay on a worker’s last wage — to new recruits. They now offer schemes based on average pay throughout a career.
The NATIONAL ASSOCIATION OF PENSION FUNDSestimates that just 19 per cent of private sector final salary pension schemes are open to new joiners, compared to 88 per cent a decade ago…………….The Sun Fri, 27 Apr 2012
Pensions anger as even profitable firms cut benefits
Unilever the maker of everything from Pot Noodles to Dove soap, has infuriated its staff by cutting pension payouts – despite being highly profitable. Shell, another household name, has followed suit with plans to cut retirement incomes.
Unilever suffered a wave of strikes which started last week and will continue for the next five days. Much of the anger among employees at its factories and research units is focused on the company’s £6bn operating profit and the pay, bonus and pension top-ups awarded to chief executive Paul Polman. He pocketed £2.8m last year, of which £1.7m was a performance-related bonus. His pension was increased by a company donation of £352,000, according to the 2011 annual report.
For staff, it is a typical them-and-us story of sky-high rewards for directors while shopfloor workers are bullied into accepting reduced standards of living. The changes to pension scheme rules are the flashpoint. However, a closer look at the changes makes it harder to characterise as a poor deal.
In 2008, Unilever made its first move to save costs, but refused to push new staff into the default arrangements adoped by other companies, which rely on stock market investments and put all the risk of generating a retirement income on to the employee. The board said new joiners would receive a pension based on their career-average earnings. It thus maintained the scheme, and effectively guaranteed a maximum cut of only 20% to pension payouts, while rivals were devising schemes for new staff that would mean losses of 60% at least.
Last year Unilever told staff that the costs of providing a pension had soared following a rise in life expectancy, poor investment returns and the threat from more costly regulations. It meant all staff, not just new joiners, needed to move to the new career-average scheme.
Unions are well aware of the rising costs of pension provision. Average life expectancy is 80, up from 72 in the 1970s, according to professor David Leon of the London School of Hygiene and Tropical Medicine’s epidemiology unit. He says it is likely to carry on rising as more people stop smoking and eat healthily, though increasing obesity and diabetes could reverse the effect. According to the Office for National Statistics, between 2004-06 and 2008-10 average life expectancy for women rose by a year to 82.3, while for men it rose by 1.2 years to 78.2.
Poor investment returns are the other side of the equation, after a decade of low interest rates and underperforming stock markets. The index of Britain’s top 100 companies declined 5.5% last year. In fact, growth in most schemes over the past 10 years has been simply a result of employee and employer contributions. Investment gains, such as they are, have struggled to keep pace with inflation.
Firms also face extra regulatory costs because of European Union plans to categorise occupational pension schemes as insurance vehicles. This will mean they must boost their funding position, something they can only do at their own expense.
Unions also know that the biggest losers from the shift away from final-salary benefits are middle managers on higher pay. Those at the top have risen through the ranks to a much higher salary than the one they started on. A career-average scheme takes into account income levels during the early years of a career and can drag down the total.
Then there is the question of Polman’s pension contribution from the company, which amounts to a third of his £1m base salary. It seems a high figure until pension analysts point out that most employees over 50 in a final-salary scheme will enjoy a pension contribution of at least a third of their salary.
One of the main unions in the Unilever battle, Usdaw, supports Tesco’s career-average scheme. And the deal it signed meant all staff foregoing their existing final-salary benefits. Unilever will protect all previous commitments.
Shell, on the other hand, is representative of most FTSE 100 firms. It plans to direct new employees into a stock market-related scheme while retaining a final-salary option for existing employees. This is the traditional solution of finance directors, who have disliked the unlimited liability and rising costs of final-salary pension schemes since the mid-1990s.
The banks were the first to ditch their final-salary commitments. In the stock market crash of 2003, almost all the 7,000 remaining firms with final-salary schemes shut them, though, like Shell, only to new members. This created a two-tier workforce inside many companies, something which unions felt obliged to ignore.
Some workplaces took a stand against the shift to retaining final-salary benefits for existing workers and stock-market plans for new staff but, outside the public sector, these campaigns fizzled out.
The UK now has an ageing group of about 2 million employees working towards retirement with their final-salary benefits intact. Another 16-18 million have some of their working life covered by a final-salary scheme.
But the bulk of contributions for 20 million workers with a pension are in the new stock-market schemes that account for 88% of all current contributions, according to pension advisers Towers Watson.
Final-salary schemes usually guarantee to provide a retirement income after 40 years’ service worth two-thirds of a worker’s final pay cheque. With a stock market-invested pension it is a very different picture. For many people it has meant getting back little more than was put in, despite the stock market having more than doubled its value in 20 years. The result is a pension worth no more than a fifth of final salary.
Fund managers, who are often blamed for siphoning off much of the investment gain in pension schemes to pay their commissions and fees, are unlikely to make much progress in the next few years of recession and lacklustre growth across the developed world. This will only lead to smaller payouts from the new breed of cheaper scheme. In this environment, strikes against businesses such as Unilever that continue to offer generous guarantees could become harder to justify……………..The Observer Sunday 22 January 2012
PENSIONS IN CRISIS AS FUNDS COLLAPSE – UK EXPRESS 14/1/2012
PENSIONS IN CRISIS AS FUNDS COLLAPSE
A shocking 90 per cent of firms’ final salary retirement schemes have been closed
Tuesday January 3,2012
By Sarah O’Grady
BRITAIN’S private pensions system has suffered a “seismic collapse” to leave millions of savers facing a bleak retirement, new figures show today.
A shocking 90 per cent of firms’ final salary retirement schemes have been closed with experts declaring the “golden age” of pensions over, according to latest research.
In a further blow, some 40 per cent of the surviving deals cannot have any more cash paid into them.
But public sector schemes are still booming – with top pensions advisers claiming the gulf will become ever wider and create a two-tier pensioner “class”.
The warnings were issued by the Association of Consulting Actuaries who said more company cutbacks could not be ruled out as the economy continues to stutter. It called on the Government to make “bold moves” in correcting the imbalance between private and public deals.
ACA chairman Stuart Southall said: “The Government needs to be bold in helping private employers consider new ways to boost pension savings so public sector pensions are not ‘far better’. A more level playing field is clearly a sensible aim but it is possible attempts to achieve this have already been undermined by the seismic collapse of private sector pensions.
“In both sectors, it seems probable that the later the cure the stronger will have to be the medicine.”
The report, Workplace Pensions: Challenging Times, found a growing trend among private sector employers to review existing arrangements and look for ways to slash pension expenses.
Around three-quarters of employers are likely to automatically enrol all employees into their existing pension plan when a shake-up takes place in October, but 27 per cent are likely to review existing pension benefits to offset the cost of higher membership.
One in five of the 468 employers who responded to the ACA survey is looking to cut their pension spend, with just over a quarter budgeting for the cost of auto-enrolment. The employers run over 560 pension schemes with combined assets topping £114billion.
Joanne Segars, chief executive of the National Association of Pension Funds, said: “The private sector is struggling to afford final salary pensions, and inevitably more will close.
“We estimate up to a quarter of a million private sector workers have been moved out of their final salary pension over the past three years.”
At present, nine out of 10 employers say their employees retire at age 65 or younger, according to the ACA.
But in under a decade, close to four out of 10 expect the typical retirement age to be 67 or later, and one in six employers expects the typical retirement age to be between 68 and 70 by 2020. Around eight out of 10 private sector employers supported recommendations that public service pensions should be scaled back and member contributions should increase.
Nine out of 10 agreed that the pension age in such schemes should increase to the State Pension Age.
The report comes days after the Government revealed an “alarming” pension shortfall. Fewer than four in 10 Britons are saving into a private pension, the lowest level for a decade.
Ministers were “alarmed” by the figures and warned that millions face a “poorer future” when they retire.
The new analysis by the Department for Work and Pensions found that the number of working-age people saving into a private pension fell from 46 per cent in 2000 to 38 per cent last year.
A DWP spokesman said: “Automatic enrolment will enable millions of people to save, many for the first time.”
http://www.express.co.uk/posts/view/293243/Pensions-in-crisis-as-funds-collapse
COUNCIL STAFF REJECT PENSION OFFER -Express 14/1/2012
COUNCIL STAFF REJECT PENSION OFFER
Public sector workers marched in London against pension cuts
Monday January 9,2012
The Government’s hopes of resolving the bitter dispute over public sector pensions have received a fresh blow after the leaders of tens of thousands of council workers rejected a final offer.
The Government’s hopes of resolving the bitter dispute over public sector pensions have received a fresh blow after the leaders of tens of thousands of council workers rejected a final offer.
Unite’s national local authority committee turned down the proposed deal, saying “genuine discussions” should be held without “arbitrary” deadlines.
The move follows a similar decision last week by the union’s health executive and a decision by the British Medical Association to survey around 130,000 doctors and medical students on the offer, raising the prospect of their first industrial action ballot for more than 30 years. The two biggest teaching unions also refused to sign up to the deal as they pressed for more talks.
Unite general secretary Len McCluskey said: “Unite’s local authority representatives have lost trust after (Communities and local Government Secretary) Eric Pickles let the Government’s real agenda out of the bag.
“The security of our members in retirement is just too important to leave any space for doubt or mistrust, so the union’s senior representatives in local government have rejected the Government’s proposals. There now needs to be genuine discussions without arbitrary deadlines. Our members need clarity before we can move forward.”
Unite said a row before Christmas over a letter from Mr Pickles, raising the issue of an employer cost-ceiling on pension contributions, had caused a “crisis” of confidence and trust.
Leaders of the biggest public sector union, Unison, will meet on Wednesday to consider the final offer, while unions will hold talks at the TUC later this week to decide their next move.
Bob Neill, Minister for Local Government, said: “The decision by Unite is disappointing, but Unite only have 30,000 members in the Local Government Pension Scheme, out of a total active membership of 1.6 million.
“Our proposals represent a good deal for public sector workers and taxpayers. We need to put local government pensions on a sustainable and fair footing, and this is a generous offer. Town hall pensions now cost taxpayers £300 per household per year, and the cost has trebled since 1997. This is not fair on families and pensioners struggling to pay their council tax bills, and that is why this Government is committed to fair reforms.”
Unite said the Government statement had “massively” under-estimated its membership, insisting it had 90,000 members in local government across the UK.
http://www.express.co.uk/posts/view/294583/Council-staff-reject-pension-offer
Silentnight forced to ask for debt help
Silentnight has said it plans to ask its creditors to agree a rescue plan.
The debt-laden bed manufacturer said it was left with no choice but to seek a Company Voluntary Agreement (CVA) after banks refused to renew existing loans.
“The group is trading profitably and generating cash,” claimed the company’s chief executive Neal Mernock.
He blamed the retailer’s unmanageable debts on onerous pension liabilities dating back to acquisitions made in the 1980s and 1990s.
The CVA is being used by the Barnoldswick, Lancashire-based company to seek an immediate injection of cash.
“Silentnight is one of the UK’s best known brands, with a proud history of manufacturing and distributing beds since 1946,” said Mr Mernock.
“The approval of the CVA proposal by our creditors will be a major step forward in securing Silentnight’s future.”
The firm employs just over 1,250 people across the North of England and the Republic of Ireland.
The company says the move was forced by the decision of its banks to withdraw existing credit facilities, and a the rejection by the pension regulator of a plan to offer an equity stake in the company in lieu of its pension fund debts.
“With the ongoing support of our loyal suppliers and staff, and on a more stable financial footing, we are confident that Silentnight will continue to generate substantial profits, to outperform the wider market, and to innovate and grow market share as home to both the UK’s and the world’s biggest bed brands,” added the chief executive.
http://www.bbc.co.uk/news/business-13159806
The final chapter for Reader’s Digest? After 72 years, magazine collapses into administration as pension fund bail-out fails
The future of Reader’s Digest is under threat after the British edition of the magazine went into administration, putting 117 jobs at risk.
The decision was confirmed yesterday after negotiations between the company’s U.S. parent group, Reader’s Digest Association, and the Pensions Regulator broke down over its UK pension fund.
The dispute centres on how the company will fill its £125million pension deficit.
As an agreement could not be reached, the magazine said it couldn’t meet its pension obligations and would not be able to continue operations.
Administrators Moore Stephens confirmed they were seeking a buyer for the title and said they would continue publishing the lifestyle and household tips magazine in the meantime.
Last week’s prize draw would also be paid out to winners, according to the administrator.
The failure of negotiations means the title’s UK pension fund, which has 1,600 members, may have to be bailed out by the Pension Protection Fund.
The PPF pays out in full for members currently drawing a pension, but caps payment for those who are yet to retire at 90 per cent, with a ceiling of around £28,000.
This would leave around 32, or 2 per cent, of members of the UK Reader’s Digest Scheme out of pocket.
The U.S. arm of the company filed for bankruptcy protection last year.
Founded in the the U.S. in 1922, Reader’s Digest – whose motto was ‘Articles of enduring interest’ – was first published in the UK in 1938.
It has offices in Canary Wharf, east London, and Swindon, Wiltshire.
Enlarge 
A copy of Reader’s Digest magazine is displayed on a rack at a supermarket in San Anselmo, California. The U.S. parent hit hard times after embarking on a highly leveraged £1.8 billion buyout deal that was backed by private equity
A copy of Reader’s Digest magazine is displayed on a rack at a supermarket in San Anselmo, California. The U.S. parent hit hard times after embarking on a highly leveraged £1.8 billion buyout deal that was backed by private equity
The group stressed the UK administration will not impact its other titles across the world.
The Pensions Regulator declined to reveal the reasons behind its decision not to agree the pension fund deal being put forward by RDA, as it does not comment on individual cases.
But it said it was now considering using its powers, which could see the watchdog force US parent RDA to pay up rather than see the scheme fall under the PPF.
The Pension Regulator said: ‘The pension fund will now enter an assessment period where eligibility for compensation under the PPF will be assessed.
‘We had hoped that an alternative solution could be found for the pension fund but this was not possible. The regulator is now considering its next steps, including use of its powers.’
Comet sold for £2 and new owners get £50m sweetener
Loss-making electricals chain Comet has been sold to a turnaround specialists group for just £2, in the latest sign of the dire state of UK consumer electronics spending.
Parent company Kesa Electricals said on Wednesday morning it would additionally give the new owners a £50m dowry, adding that the UK retailer’s sales were down almost 20% for the first six months of its financial year.
New owners OpCapita, an investment firm which specialises in turnaround situations, meanwhile said it had “no intention to make redundancies” or to implement a significant closure programme for Comet’s 248 stores. It will however adopt the company’s existing cost-cutting plans. It has committed to operate Comet for “at least 18 months” from completion of the deal, expected in February of next year.
As part of Wednesday’s deal Kesa retains responsibility for the Comet pension scheme, which has a €45m (£39m) deficit. Kesa will invest £50m into the new entity, but Kesa chairman David Newlands said it would be wrong to predict a great return: “The £50m is categorised as an investment. We had to pay £50m to get the business away. We will write it off as having no value.”
Kesa will only get a return on its £50m ‘investment’ if Comet is sold on for more than £70m.
OpCapita’s investors will put in £30m of cash and the business will have access to a further £40m as backup. OpCapita is buying Comet through a group of companies named “Hailey”.
A key question for Comet’s 10,000 staff will be whether the new owners decide to make further job cuts or store closures. It is expected that OpCapita will make their plans clear once the deal is completed, or shortly after.
A spokesman for the investment group said: “At this stage there is no intention to make redundancies. We don’t intend for there to be a significant store closure programme.”
Senior management at Comet are expected to be kept on. Former Dixons chief executive John Clare, an adviser to OpCapita, is expected to have a key role, as is David Hamid, a partner in the investment firm and former board member of Dixons and CEO of Halfords.
Kesa said it would not delist in the UK despite disposing of Comet: “We have a primary listing in the UK. That’s the way it will stay.”
Among other things the deal rids Kesa of Comet’s €90m annual lease bill. The deal also carries a short non-compete arrangement preventing Kesa from returning to the UK electricals market. “It’s highly unlikely that we would want to,” Newlands said.
Kesa shares were 7% up following the announcement – trading at 109p.
http://www.guardian.co.uk/business/2011/nov/09/comet-sold-for-2-pounds-kesa
Sleepwalking towards a retirement nightmare
The Bank of England (BoE) surprised the financial markets by announcing that it is embarking on a second round of quantitative easing (QE).
QE is achieved by the BoE (which is of course owned by the UK Government) buying gilts issued by the UK Government. The sellers of these gilts will mainly be UK insurance companies and pension funds which hold them as investments. The money used to buy these gilts is created electronically, at the press of a button.
The idea is that the money created will be deposited by the recipients in their respective bank accounts in return for the gilts they sell to the BoE. This increases bank reserves and thus supposedly the ability of banks to lend to UK businesses. The money will eventually be “spent” by the recipients (on shares for example).
The value of the assets bought rises, confidence returns and the economic environment improves. So the ability of banks to lend increases, the supply of gilts falls (as more become owned by the BoE) and the price of shares will increase, or will fall less than they otherwise would. Well that’s the theory.
The problem is that no-one knows whether QE really works this way, as it is impossible to model what would have happened had QE not occurred. The aim is to increase economic activity by increasing the supply of money. Keynes once described attempts to increase economic activity by increasing the supply of money as “like trying to get fat by buying a larger belt”.
In raising the total amount of QE to a total of £275bn, the BoE will have purchased gilts to the equivalent of:
- 19% of UK GDP,
- 32% of the total value of UK gilts issued, and
- 45% of the type of gilts the BoE will actually buy (maturities of three to 25 years).
Such a vast sum of “asset purchases” leaves less to buy in the open market, effectively pushing up the prices of gilts by draining their supply. This, as far as pension funds are concerned, is a nightmare.
QE may have the effect of increasing the price of shares to some degree (or causing them to fall less than they might otherwise do so), and so pension funds invested in shares will tend to rise in value (or fall less). Gilt yields will fall as their price rises and annuity rates will fall even further.
Imagine that you are a male aged 60, married with a spouse three years younger, and have a pension pot worth £300,000. Even before QE has its desired effect, this is sufficient to buy an annuity based on the options set out below:
| Option 1 (single life level annuity) | £15,216 a year |
| Option 2 (single life annuity increasing by RPI) | £8,256 a year |
| Option 3 (joint life level annuity) | £13,464 a year |
| Option 4 (joint life annuity increasing by RPI) | £6,600 a year |
Source: http://tables.moneyadviceservice.org.uk/Comparison-tables-home
Note: Options 1 and 2 include a five-year guarantee. Options 3 and 4 are based on a 33% reduction of the annuity on the annuitant’s death and no guarantee period.
If instead our 60 year-old male choses to go into drawdown instead of securing an annuity, the maximum income using the GAD tables that could be drawn would be just £15,300 per year.
The GAD tables calculate the amount that may be drawn down by reference to 15-year gilt yields. The current 15-year gilt yield rate for this purpose is just 2.75%. Once QE gets under way this should reduce further, as will the permitted drawdown and annuity rates generally.
You can see that, for those with defined contribution pension plans, to get a decent retirement income is almost impossible for most. When was the last time you checked the value of your pension fund?
For those with deferred pensions in final salary schemes, QE will cause scheme liabilities to rise – not good news if the scheme is already in deficit. Ironically transfer values should rise rise as well – fine if the scheme is not in deficit and can afford to pay increased transfer values.
Consider also public sector pensions (civil servant or teacher pensions for example). The increased scheme liabilities (and increased transfer values) are underwritten by the state. So QE has the effect of increasing the deficit when these liabilities are factored in. No wonder the Government wants to cut public sector pensions.
As the economic crisis continues to unfold, the pensions time-bomb that many have been warning of for years has just become today’s pensions nightmare.
http://www.international-adviser.com/tax—technical/sleepwalking-towards-a-retirement-nightmare
