The implicit message: Spend your money as soon as you get it and depend on the pittance provided by the government in your old age
In a mere 24 hours the size of the pension deficits facing some of Britain’s biggest companies has jumped by around 100 billion pounds to a record 390 billion - the equivalent of over 150,000 for every member of a final salary scheme. The increase is a direct result of the Bank’s announcement this week to create 150 billion and pour it directly into the financial system, experts said.
It sparked further criticism of the authorities for endangering the financial future of Britons’ savers in their efforts to bring the financial crisis to an end. The Government and Bank have already been accused of obliterating the incentive to save by slashing interest rates on savings accounts and visibly attempting to stoke up high inflation in the years to come.
The Bank was accused of hammering the final nail into the coffin for Britain’s final salary pension schemes, which have seen their deficits climb in recent years, partly as a result of Gordon Brown’s decision as Chancellor to levy a 6 billion tax raid on pension funds’ dividends. Some 2.5 million workers are currently signed up for these schemes which provide retirees with a guaranteed annual income when they reach the appropriate age. Having enjoyed a small surplus only a year ago, these funds have also been hit by the fall in the stock market over the past year.
However, the effect of the Bank’s scheme has been to increase the deficit between what is in the funds and what is needed to pay out future pensioners by an almost instant 100 billion. Although some expect the deficits to fall in the years ahead as the economy improves, insiders warned that this could be the final straw that persuades companies to shut down these schemes altogether and turn instead to far less generous defined contribution plans.
However, experts warned that even these more parsimonious schemes, which 8 million workers are subscribed to, will suffer as a direct result of the Bank’s actions. The amount these people receive from their pension depends not only on the size of pot they amass over their working life but on the rate of the so-called annuity which provides them an annual income from the moment of retirement. Over 600,000 people are due to retire onto these schemes over the next year. Should annuity rates fall a further percentage point, it will mean the annual pension of someone with a 100,000 pension pot may drop from around 7,000 to 6,000. Experts said anyone retiring in the coming years may face an instant decrease in what they could hope to expect from their pension.
Tom McPhail of Hargreaves Lansdowne said: “The sad truth is that pensions savings are going to be what pays the price for these efforts to bail out the economy in the short term. The apparent plan is to try to fix today’s problems at the expense of our children - by paying a shedload of money which will have to be paid back tomorrow. "It will hammer the final nail in the coffin of final salary schemes, as well as cutting the annuity rates for anyone with a defined contribution set to retire imminently.”
However, public sector workers, many of whom are on generous final salary schemes, will be unaffected by the increase in deficits, since their pensions are paid by taxpayers rather than cash-pressed companies.
Posted by John Ray. For a daily critique of Leftist activities, see DISSECTING LEFTISM. For a daily survey of Australian politics, see AUSTRALIAN POLITICS Also, don't forget your daily roundup of pro-environment but anti-Greenie news and commentary at GREENIE WATCH . Email me (John Ray) here