Are pensions 'the same as any sort of pay'?
Following the announcement that Royal Bank of Scotland (RBS) is to restrict final salary retirement incomes, an expert has warned that It is a mistake to see pensions as something which should be provided by businesses.
The bank is to cut the costs of providing guaranteed pensions and cut its pension liabilities by £500 million in the first year, in an attempt to reduce costs.
Following the scandal surrounding former RBS chief Fred Goodwin, the group have also announced they are to reduce the lump sum that is payable on early retirement, leading to questions about management skills.
Reacting to the moves by RBS, Martin Wheel, director of the National Institute of Economic and Social Research, said: "It is a mistake to see pensions as any different from any other forms of pay."
He went on to say that he did not see it as "any different from a pay freeze".
The bank said it would cap the amount of pensionable salary increases to two per cent annually or the rate of inflation, whichever is lower, and reduce the lump sum payable on early retirement.
Companies such as BT and RBS face huge pension liabilities. How should they be dealt with? Is a pension cut as good as a pay cut?
Facebook
LinkedIn
Twitter
YouTube
Comments
Pension is a part of total remuneration so a cut in pension is a cut in your package. The reality is that the the majority of the private sector moved away from final salary schemes some time ago (with a few notable exceptions) due to increased costs. It's a fact of life.
Unfortunately you are right Vince - the days of good company pensions provisions are a thing of the past as the cost has risen dramatically.
Although it is only part of the pay package the real benefit is substantial. Even those companies which are switching to money purchase schemes (an agreed level of contribution rather than guaranteeing your pension level as in final salary schemes) are offering a much lower contribution level than under the original scheme.
Older people in particular are much worse off. Because final salary schemes spread the cost of provision of all of the workforce the young subsidise the old. If you got a quotation for providing a pension of £1,000 per year for someone in their 20's or 30's and compared it someone in their 50's the difference is astronomical.
The value of final salary scheme benefits are therefore a much bigger loss when you are older.
There's always the risk that if you change people's pension entitlements and the value of these entitlements, they will not be able to retire.
These people, demotivated at having to "shelf" their retirement dreams and continue working, then stay in the position for purely financial reasons.
You then end up with demotivated and potentially less productive staff, fewer jobs for people entering the employment market, therefore less taxes and national insurance payments and greater strain on the Government coffers through job seekers (or contemporary equivalent) and companies having to cut pension provisions even further because they're failing to make enough profits from their activities to cover their current commitments.
I think this is a vicious circle which we can ill afford to enter.
Something needs to be done though. Companies like GM in America, and even BT over here are being strangled by the exhorbitant pension requirements they have. I believe the pensions at BT are state backed as well so if they send the company under it'll be the tax payer labelled with them.