Over the past few months, occupational pension schemes have been under sustained attack by the bosses. One major company after another, from the large banks like HSBC to retail chains like Sainsbury, has been announcing the closure of pension schemes to new entrants or, as with the Big Food Group (the owner of Iceland supermarkets) the complete ditching of schemes, closing them to existing workers as well.
This has, however, not been swallowed everywhere. For instance at Caparo Steel the workforce staged a series of one-day strikes against plans to end their final salary scheme and forced the company to back down.
The main reason the bosses put forward for ending existing occupational schemes or reducing pension provisions is the slump in share prices over the past two years. Yet ironically, the cheaper alternative schemes (meaning cheaper for the bosses, of course) which are being introduced to replace existing occupational pensions make pension payments entirely dependent on the vagaries of the stock market. In other words, the bosses consider that it is alright for pensions to be dependent on the ups and downs of share prices, but only provided all the risks involved are born by workers alone!
Of course what the bosses are really after is just another way of reducing their overall labour costs - and indeed what they are doing by cutting pension benefits is cutting workers' pay. Because pensions are, after all, merely deferred wages.
The other justification for the current assault on pensions - and one which is fully endorsed by government ministers - is the increasing age of the population. Statisticians tell us that we are all living longer, hence pensions have to be paid for longer and so we are costing the bosses - and the state - much, much more than we should!
So the "solution" proposed is that workers should retire later and, therefore, that they should pay more in pension contributions and earn less in pension payments - yet another way of cutting the bosses' wage bill! Except that, of course, for the large numbers of workers who do the really hard work for society, the level of retirement age which is being suggested - 70 or so - would mean no retirement at all. Of course, for the bosses this is much cheaper, all round!
The limits of the occupational pension
Of course, the pension system has never offered the majority of the working class a happy, trouble and debt-free retirement anyway.
Since the postwar welfare system was introduced, the main function of occupational pensions has always been to make up for the miserly amount of the universal state pension - a mere 19% of average wage when it was created, without any provisions for upgrading it in line with the cost of living (at least not until the 1970s).
However, the existence of occupational schemes and their quality, have always depended on the balance of class forces, both in each company and in society as a whole. There was never any compulsion for the bosses to provide employees with occupational pensions.
When, in the 1970s, Labour made it compulsory for the bosses to contribute to occupational schemes and for workers to join them, it stopped short of demanding that occupational schemes should be introduced where they did not exist. Instead, the Labour government introduced a second state scheme, called SERPS, which was compulsory for all workers who were not covered by occupational schemes. But, while the SERPS pension was proportional to average past earnings, at 25% it was significantly lower than many existing occupational schemes.
The one positive thing about SERPS, however - and this was a vital point - was that like the state pension and unlike occupational pensions, it was based on solidarity between generations, with the working generation paying the pensions of the retired generation out of their wages (through employees' and employers' contributions).
By contrast, occupational funds were merely collective savings accounts. Savings were invested in all sorts of things in order to produce the highest possible return. But, as a result, pension levels were dependent on the profitability of investments and workers generally had very little control on them.
Besides, unlike SERPS, which followed workers regardless of their employers, transferring from one occupational scheme to another when workers switched jobs was a nightmare, and more often than not job transfers resulted in reduced pensions.
The role of occupational pensions as a substitute for state provisions increased even further when the Tories came to power in 1979, as one of Thatcher's first moves was to de-link the basic state pension from earnings and link it instead to the Retail Price Index. This allowed pensions to fall from 23% of average earnings in 1978 to just 16% of average earnings in 2001.
Thatcher's next move, in 1986, was to target SERPS for the chop, by paving the way for its phasing out. Incentives were introduced to encourage workers to opt out of it and buy personal pension schemes from insurance companies - which, of course, turned out to cost a lot more while paying lower pensions, due to the high administrative fees pocketed by the insurance companies.
At the same time Thatcher targeted occupational pensions, by removing the compulsion for employers to contribute and offering workers the same opt-out path as for SERPS. As a result 1m workers left occupational schemes.
Thatcher's measures weakened occupational schemes. All the more so because one of the devious effects of the financial deregulation introduced by Thatcher was to remove many of the constraints which had prevented these schemes from getting involved in risky investment. So that, by 1995, 20% of the money managed by these funds (£70bn) was roaming the casinos of the world in search of quick bucks. As a result, during that same year, a number of schemes which had entrusted some of their money with Barings Bank, suffered serious losses when it collapsed following excessive gambling in the Far East.
Nevertheless, the Tories' measures against state provisions increased the importance of occupational schemes in providing workers with pensions. But they still did not cover even a majority of the working class. Even today, these schemes only cover one in two workers.
Raiders of the lost pension funds
Of course, occupational pensions were always in the untrustworthy hands of employers, though formally they were overseen by "independent trustees", often including representatives from the workforce. But at the end of the day trustees' powers of veto amounted to nothing, since a board of company directors could always override them, and decide to terminate a scheme, change its provisions or lay its hands on part of the funds. It was this latter possibility that the Tories made easier.
From the moment share prices began to increase, in the mid- 1980s, many occupational funds began to build large surpluses. In 12 of the past 20 years, these schemes earned a 20% or more annual return on investment. And so many companies used the opportunity to raid these funds on all kinds of pretexts, as well as to take long "pension contribution holidays." Not only were these raids - which amounted to robbing workers of their savings - made legal by Thatcher, but they were in fact strongly encouraged by a piece of legislation she introduced, which threatened to tax anything over and above 5% of the minimum legal requirement for the fund to be able to meet future obligations (a minimum which, because it was based on over-optimistic share prices performance, turned out later to be far below what was actually necessary).
So, in the early 1990s for instance, the privatised electricity companies used £1.2bn from the workers' occupational schemes they had taken over at the time of privatisation, to pay for redundancy packages (i.e. they used the workers' own money in order to get rid of these same workers!). Other companies took money out of these funds to pay dividends to shareholders (i.e. paid dividends out of workers' wages, instead of the company's profits!).
In another, more recent, case, in 1999, British Airways was quite blatant about its intention to use its employees' pension fund to help make up for a £355m drop in profits. To this end, it devised a merger between two separate existing occupational funds. Then BA used the fact that the merged fund had a surplus to justify a reduction of its contributions to employees' pensions by £90m per year over the next 4 years!
The danger of Thatcher's policy was highlighted by the Maxwell scandal, which exposed the absence of any "legal" protection for workers' pensions. Maxwell raided the occupational fund of the Mirror Newspaper Group, in order to patch up the cracks which were developing in his business empire. A host of very respectable banks - in fact among the biggest - which advised him, knew about this but they did nothing to stop him. So that when Maxwell committed suicide, many of the Mirror's employees were left with nothing except the resort to long law suits.
It was this scandal which finally led to the 1995/97 legislation to set a new "Minimum Funding Requirement", which was meant to ensure that occupational pension schemes would have enough money in their funds to cover their commitment to fund the present and future pension benefits of their members.
However this "protection" still does not mean that workers' pensions are actually safe. For instance, when a company winds up a scheme unilaterally, workers only get at most 60-80% (or even less in many cases) of what their contributions would normally have earned them up to the date of the wind-up. What is more, if a company goes bust, existing employees' pensions are not even fully protected because repayment to the banks comes first!
Any scheme as long as it's cheap!
What is the state of play today in occupational schemes? Since the end of the Tory years, these schemes fit broadly into two large categories.
In the so-called "defined contribution" schemes, members know in advance the size of their contributions and, in some schemes, they can increase or decrease these contributions if they wish to do so. The final pension they get once they reach retirement age is only determined by the profits accrued by the fund during the time they have contributed and the total amount they have contributed. So if the scheme's investments perform badly, whether this is due to mismanagement or due to a slump on the stock market, pension payments may be low, and sometimes very low.
In the so-called "defined benefit" schemes, by contrast, the level of pension payments does not depend on how the scheme's investments perform. Instead it is determined by the number of years over which the member contributed and, depending on the scheme, either his average salary over his whole career, his salary over his last few years in the scheme, or his final salary (in the latter case the scheme is called a "final salary" scheme). However in order to ensure that this level of pension is reached at retirement age, contributions may vary depending on the performance of the scheme's investment. So, if the stock market goes down, members may be required to increase their contributions.
In addition, there are also some schemes which are a mixture of both types, but these are rather exceptional.
Since the Thatcher years, employers have no longer been required to contribute to occupational schemes. But they usually do so, and in both kinds of schemes. This situation is, to a large extent, inherited from the past decades when the bosses felt they had no option other than to be seen making concessions to the workforce. But the large number of companies which have chosen to use the surplus from occupational pension funds to take contribution holidays, rather than to improve their employees' pensions, shows that given the chance, bosses can be expected to stop contributing.
From the workers' point of view, the only advantage of "defined contribution" schemes is that they usually allow them to pay lower contributions. But if they do, the level of their pensions is bound to be low, especially if economic conditions are unfavourable.
By contrast, "defined benefit", and particularly "final salary" schemes are usually more advantageous in the sense that they provide workers with a higher pension and one which is better protected against the ups and downs of the financial market. But, in order to maintain this protection, contributions can become expensive if the economic situation turns sour. When this happens, the balance of forces between the workforce and the company becomes decisive. It has often happened in the past that when this balance of forces was favourable to the workforce, the employers increased their own contributions rather than those paid by employees.
From the point of view of employers, the advantage of "defined contribution" schemes is that there is no pressure on them to increase their contributions due to economic circumstances - although some choose to match their employees' contributions by paying a proportional amount into the fund, regardless of how large this amount may be. Overall, however, "defined contribution" schemes are significantly cheaper for employers than "defined contribution" schemes. This is shown, for instance, by a recent report published by the TUC which says that, when they do contribute, the bosses' contribution for the average employee is £42/w lower in "defined contribution" schemes than in "defined benefit" schemes.
By March 2002, there were 103,165 occupational pension schemes in existence. 76% were defined contribution schemes (these include in particular the overwhelming majority of small and medium-sized companies). Only 11% were "defined benefit", and 3% were hybrid schemes with both features. However, "final salary" schemes have, up to now, been the commonest arrangement amongst the largest employers. As a result, a relatively large proportion of full-time workers (46%) are still covered by "defined benefit" schemes of one type or another. But at the same time, according to TUC figures, 12m workers have no extra pension cover on top of the basic state pension - whose full-rate is a derisory £3,926/yr today.
Blair shows the way to the bosses
Blair's policy, once in power, was not only to retain Thatcher's pension "reforms", but to reduce state pension provisions even further. His stated objective was to cut the state's contribution towards pensioners' incomes (both in terms of pensions and means-tested benefit) from 60% down to 40% over 50 years.
Employees were divided into two categories. Those earning less than £10,000/yr were, since April this year, to benefit from a replacement for SERPS (finally killed by Blair), called S2P. Although this "state second pension" is initially slightly higher than SERPS, it will become flat-rate by 2007 and will require 49 years of contributions for anyone to get the full amount.
Other employees were "awarded" a new Blairite gimmick, called "stakeholder pensions", which became available in April 2001. These are supposedly "low- cost" privately-run pension plans, which can be individual schemes (for those with earnings in the £10,000-£20,000 bracket) or collective schemes (which are then "defined contribution" schemes) contracted through an employer. In these plans, contributions can be as low as £20/month. Of course, at such a low level of contribution, the pensions paid are very low, but are also totally dependent on the ups and downs of the financial markets.
What was suspect about these "stakeholder pensions" was that they were entrusted to notoriously greedy profiteers like insurance companies and that they came pre-packaged in Blair's rhetoric about the need for each individual to "save" for his old age. But the justification for introducing these pensions - to provide a simple mechanism through which workers could retain their pensions when shifting jobs - sounded like a good idea.
Except, of course, that there was an added twist to these "stakeholder pensions". Employers who did not provide occupational schemes had now to provide a "stakeholder pension" to their employees, but without having to contribute to it. And employers who did have an occupational scheme were offered incentives to transfer their employees to a "stakeholder pension."
At a time when many companies had got into the habit of paying reduced pension contributions for years, thanks to occupation scheme surpluses, and when all employers were looking for ways to cut their wage bills, this was an encouragement for the bosses to dismantle existing occupational schemes in order to stop contributing to their employees occupational pensions - something that a number of companies had already started doing without any prompting.
They want to have their cake and eat it
By July this year, more than half of Britain's 100 largest companies had already closed their existing "final salary" schemes to new entrants and in many cases replaced them with cheaper, "defined contribution" schemes. The list includes HSBC, Barclays, Abbey National, ICI, Marks & Spencer, Sainsbury, WH Smith, and AstraZeneca among many others. And BT and British Airways closed their "final salary" schemes even before these others.
Of course these companies did not admit that their only reason to do so was to cut their workers' real wages - although this is what it amounted to. No, they justified these measures by the slump in the stock market.
The Labour peer, Lord Paul of Marylebone, the owner of Caparo Steel, provides a good example of this. After ten years of taking a pensions' contribution holiday, Lord Paul announced his intention to close his "final salary" scheme to the existing workforce by 1 July 2002. Workers were offered two options: either to accept a substantial reduction in the level of pension payments they would receive, or to be transferred to a lesser stakeholder pension. They rejected both options. When Lord Paul was asked in July, by Channel 4 news, whether he was ashamed about the announcement, he said no, he was not and explained clumsily - and dishonestly - while maintaining that he said this because he was more honest, that "Final salary schemes are a problem as they put unlimited liabilities on companies, which in these days of very large fluctuations in stock markets, with rules and regulation changing every day, they are almost impossible to carry them on (sic) any more". After five 24-hr strikes, Caparo backed down and agreed that workers could remain in the "final salary" scheme, though certain new conditions were imposed.
It is true, of course, that in 2000 and 2001 falls in pension assets on average of 0.9% and 9.8% respectively. And fund managers predict that there will not be a profit recovery to match the previous bonanza years, at least in the short to medium term. So that companies are now complaining about a growing "black hole", in pension funds which is estimated by some at £70bn.
But what about the extra profits made by companies from pension fund surpluses over many years already - whether through contributions holidays or by means of outright raids?
The National Association of Pension Funds found that 28% of private sector schemes were still benefiting from a contribution holiday this year, with 18% enjoying a temporary reduction of contributions, while for 88% of their employees, contributions remained unchanged. Just through cutting their pension contributions, employers already made £18.5bn throughout the 1990s, according to the TUC!
As to outright raids, there are no overall figures available. But the sheer size of the largest pension funds is in itself an indication. In 2000, British Telecom had £29.7bn, British Coal £26.1bn, Electricity Supply £22bn, University Superannuation £22bn, the Post Office £18bn, Corus £9.1bn, etc..This means that when these funds have been in surplus, during the years of share market bonanza, this surplus has been very large indeed and has been available for companies to boost their profits and increase dividend payments, perks for executives, etc.
What is more, companies and shareholders have been raking in massive profits themselves during the speculative boom - profits which were never translated into higher wages or improved pension provisions for workers.
So, now, after having kept for themselves all the benefits of the stock market boom, the bosses are telling workers that they should foot the bill for the stock market slump with their own pensions? They really want to have their cake and eat it!
The case of British Telecom
A case in point is provided by BT, which has the country's largest pension fund. Last year its "final salary" scheme still had £25bn in it, but it suddenly "identified" a £3bn "hole". This was used to justify a decision to close the scheme to new entrants in April 2001 and replace it with a "defined contribution" scheme. And it allowed BT to cut its own contributions to employees' pensions from 9.5% of salary to an average of 6%.
But the real reason for this move was not so much the £3bn "hole", than BT's policy of cutting every corner it could in order to alleviate the burden of servicing its own massive debt.
So, for the 3,000 workers who joined BT over the past 18 months, instead of the promise of a guaranteed income on retirement, they have been asked to contribute to the "defined contribution" scheme, which will then be matched by BT and invested on the stock market. The minimum contribution from a worker is 4% of salary and the maximum 10%. But most workers have been unable to commit themselves to more than 4.7%. However, the minimum which would have been required to equal the benefits of a "final salary" scheme, is 18% to 20% of salary! And even that depends on share prices!
BT is, therefore, immediately saving a huge amount in costs by only having to contribute around half the amount which would have allowed its new recruits to get the same level of pensions as existing employees. And by the same token this amounts, in and of itself, to
a 7% cut in real wages for these workers compared to the pre- April 2001 situation.
As for BT's directors, chief executive John Condron has just been given a pension bonus of two and a half year's service which will give him a pension of £146,000 a year and a lump sum of £439,000...
This all goes to show that the bosses' excuses are just one big cover up. What is more, while they tell workers that the company can no longer afford their pension schemes, the same bosses are keeping their own executives in a "final salary" scheme and in some cases even improving it. Last year a report found that while 44% of FTSE companies had final salary schemes open to staff, 76% had schemes available for directors and we can probably assume that this disproportion remains.
Killing workers on the job
Various "scientific" justifications have been given to legitimise cutting workers' pension provisions. One of them is the worn-out idea that society can no longer "afford" to pay for pensioners whose life expectancy keeps increasing.
It is to answer this "problem" that Labour has appointed Roy Pickering, an ex-EETPU official (who found himself a job after his union career ended with the pensions consultants, Watson Wyatt), to produce a report which would "reform" and "simplify" pensions. Of course, the real aim of this "Pickering Report" is to simplify pensions for the bosses, and provide a further basis for cutting pensions for workers.
It proposes, among other things, a cut in the entitlement of widows to the pensions of their deceased spouses, further contracting out of state pensions, limited price indexation, compulsory membership of a scheme, allowing people to work beyond the age of 65, etc...
This proposal to increase retirement age is not actually new. It began a year ago with a report by Blair's minister, Baroness Hollis. Companies, quangos and ministers are now all lining up to propose the postponement of retirement age to 70 or 72 years! In other words they are suggesting that a whole section of the working class - ie manual workers and shift workers whose life expectancy is almost ten years less than white collar workers (71.1 years compared to 78.5 years) should work literally until they drop dead, depriving them entirely of any chance to rest in their old age!
The so-called Pensions Policy Institute (which involves everyone from the huge pension fund magnates to academics and trade unionists) shamelessly published a report this September which claimed that "raising pension age could point the way out of the current pensions crisis". It stated that 90% of people now live to collect their pensions compared with 66% when the current pension system was set up and that people now "enjoy" their pensions for 8 years longer than before, on average! So "to take full account of these startling improvements in longevity the State Pension age would be in the region of 72 to 75"! What "startling" progress!
The PPI's current proposals are in fact being considered for implementation only in the 2020 or 2030. But this means that anyone under 42 years today would be affected by them.
And far from being an example of progress, this can only be described as a giant leap backwards. After all, the capacity of the economy to produce material goods, its technology and productivity levels are increasing continuously. Should not this mean that the working class be freed up from the wear and tear of daily labour a lot sooner, rather than later?
Beyond pension privatisation, Blair's reforms on pensions amount to giving the bosses more scope to reduce workers' wages, by cutting their contributions to pensions or ending them altogether. People on higher wages will probably be able to continue to pay the same amount as before towards their pensions, or even a bit more, but those who cannot afford this will end up being even more dependent than before on means-tested benefit.
Pensions and social organisation
Workers rightly defend their pension funds when they are under attack. There is no reason whatsoever to allow the bosses to get away with cutting pension provisions - i.e. deferred wages.
However the real problem is that the pension system itself is inadequate and has been for a long time. But this is not due to pensions having suddenly become "unaffordable" due to longer life expectancy! The pensions system was just never designed to provide retired workers with a decent living - and this is clearly evident from the large numbers who have had to resort to means-tested benefits ever since WWII. Rather it was designed to make pensions as cheap as possible for the capitalist class.
Not that there is anything wrong, in and of itself, with the idea of postponing retirement age. Many older workers would certainly prefer to maintain useful activity for longer, rather than being thrown on the scrapheap, as they are today. But that would presuppose a different kind of social organisation - which does not force people to work a 48 (if not 60) hour week, 122 years after the working class first demanded the 8-hour day, just to be able to scrape a living! In fact it would require a drastic reduction in working hours and labour intensity, thereby making real use of the technological progress which has occurred over the past century.
For the time being, this is obviously not the case. And for a whole section of the working class, postponing retirement age would amount to killing them on the job. For this reason alone it is entirely unacceptable.
But the main flaw in the present system is the idea that workers should have to "save" part of their wages - i.e. feed it into financial market and cross their fingers - in order to build up a pension. Why should not the whole pension system work the same way that any genuine public service works? In other words, through collective funding by all members of society. Why should today's workers (and capitalists of course) not pay for the pensions of those who are retired, thereby providing a system based on a fundamental solidarity between generations, instead of Blair's and Thatcher's emphasis on individuals "saving" for their own personal future? Especially given the inevitable catastrophe this implies, since the financial institutions operate on the same basis as well ie they make sure they line their own pockets first!
Of course, Blair's "reformers" would object that the rising proportion of pensioners compared to active workers in society makes such an idea pie-in-the-sky. But does it? If all the unemployed who are being pushed out of their jobs in order to allow the bosses to boost profits were allowed to do useful productive jobs and therefore actually create real wealth, wouldn't there be more than enough surplus profit available for paying pensions? And if the multiple layers of capitalist parasites who exploit and then waste the wealth created by workers were brought to account - and their parasitism kept in check - under the control of the working population, of course, then why should there not be plenty of money available for those who need to stop working and take well-earned rest?
This would mean clipping the wings of capitalist profiteering and, ultimately, doing away with capitalism altogether, of course. And it only shows once again that for society to cater for even the most basic needs of the majority, a different social organisation is required - one which is freed of the parasitism of capital.
1st November 2002