Former Royal Bank of Scotland chief executive Sir Fred Goodwin has voluntarily handed back around half of his £700,000-a-year pension after a national outcry.
The taxpayer had to bail out the bank to the tune of £20bn after its crashing losses under Sir Fred’s leadership. Of course, Sir Fred is still in a much more fortunate position than most pensioners, still getting around £342,000-a-year from his pension. For many millions of people the prospect of even much more modest payouts on retirement are diminishing fast.
Successive Governments have repeatedly encouraged people to save for their retirement. It seemed sound advice as the state pension would only provide a very impecunious lifestyle. However, now it appears that the UK and Ireland are facing a pensions crisis. The most rewarding pension scheme — the final salary scheme which is based on contributions and salary upon retirement — is being shut down by most private companies. The proportion of employees on final salary schemes in the private sector almost halved from 23% of the workforce in 1988 to 12% in 2003. Some 96% of companies find the scheme unsustainable.
Most employers have now closed final salary schemes to new employees, forcing them into a defined contribution scheme that pays out according to what is paid in. However, latest research by insurer Prudential says the defined contribution scheme will only pay around a quarter of the pension that a person on a final salary scheme would obtain if both made contributions for the same period of time. In the Republic of Ireland the situation is even worse with pension funds there suffering the biggest losses in the developed world last year because of their over-exposure to shares and property. Almost a quarter of the population, some one million people, are within 20 years of retirement and may have to scale back their financial expectations drastically. That is a huge body blow to people who took the thrifty option and put away hard-earned money for their later years.
But in all this there is one group of people — those employed in the public sector — who can still feel fairly confident about their retirement income.
Almost all public sector pensions are based on final salaries and are therefore generous in comparison to those of most people in the private sector. Ironically, it is the taxes of those in the private sector who fund the public sector’s wages and pensions.
While the Government cannot interfere directly in the pension arrangements offered by private companies, it must ensure that employers cannot raid pension funds, and should encourage employers to honour existing final salary schemes which workers have faithfully paid into in the expectation of a reasonable retirement income.
Part of the present crisis — or black hole — in pension funds is due to the fact that companies, even in good times, did not always make their full contributions and now find themselves struggling to make up the deficit. When the financial crisis of the past year hit, the scale of their problems really became evident.
Yet, they are duty bound to honour their commitments to their workers. Whether they will is another matter entirely.