Colin Harding The government’s Pensions Bill is proof that it is waging a war against small employers. It is time to take our savings out of the Treasury’s hands
At last month’s Labour Party Conference Tony Blair and Gordon Brown gave us lots of spin about trust. Tony admitted he had lost it in Iraq while Gordon claimed that through him, “Labour is the only party trusted with the economy”.
In Building on 5 September 2003 I wrote that “we can no longer trust anything we read about or hear from politicians and their advisers”. I believe that applied to Gordon Brown then, and if anything, it applies even more now. The Treasury has become expert at hiding nasty surprises behind clever legal traps in the small print.
That is exactly what is happening to the Pensions Bill, currently being doubled in length with small print in the House of Lords.
Backed by the unions, the Labour Party conference endorsed plans to move “beyond the current voluntary system” and compel employees to join company schemes. Everyone outside the cloud-cuckoo-land of government and unions knows that the reason why the number of people saving for pensions has dropped by 30% in five years is that no one trusts government, employers or insurers with their money. In only seven years, the government has turned what was the best pensions regime in the world into the one that is most likely to collapse first.
Forcing people to invest in what they see as risky schemes that provide very poor value for money (about 4% return compared with 8-10% 10 years ago) is not the way to encourage retirement saving and will only expose employers to the charge of misselling. Most responsible employers would dearly love to wind up their defined benefit (DB) schemes and switch to agreed fixed contributions to clearly understood retirement-saving plans that provide a proper rate of return and cannot be retrospectively devalued by the government, Inland Revenue or insurance companies.
The collapse of the equity markets has had a significant effect on pension scheme values, but as in the past, this is cyclical. The principle reason for pension-fund deficits is retrospective legislation by government that has imposed changes to DB scheme valuation methods and compelled employers to retrospectively make up the deficit on their own.
The 1997 minimum funding requirement (MFR) regulations reduced, at a stroke, 100% funded schemes to only 70%. The current Pensions Bill’s anti wind-up proposals, changing the valuation calculations yet again, will reduce a 100% MFR-funded scheme to 65%.
Not content with ruining our pensions system in seven years, Gordon Brown clearly wants to do the same to the SME sector
The bill gives a pensions regulator the power to issue “contribution notices” to sponsoring employers to make up these deficits. If (as will happen in many cases) the company does not have the funds, it will be forced into liquidation. Under the aptly named “moral hazard clauses”, any holding, group or associated company will be pursued for the outstanding balance and if that doesn’t work, they could pursue shareholders, directors and trustees.
This is clearly another front in the government’s war against small employers and will put many of the most responsible companies with DB schemes out of business. It will dissuade anyone from investing in or being a director of any company with a DB scheme. As happened at WH Smith, such companies will become impossible to sell, restructure, merge or rescue. Any pension’s liabilities will be transferred to the purchasing company – however they attempt to avoid it.
The Pensions Bill is set to become Gordon Brown’s Iraq. Not content with ruining our pensions system in seven years, he clearly wants to do the same to our vibrant small and medium-sized enterprise sector and so precipitate the next recession. I wonder if he will handle the post-war insurrections better than Tony Blair.
If this worries you, send a copy of this column to your MP with the following suggestions:
- Drop the current Pensions Bill and Pensions Protection Fund proposals and insist that the government pay compensation to members of failed schemes direct
- Take this compensation from the £470bn that is needed to cover the public sector pensions deficit
- To facilitate this, change all DB schemes, including public sector pensions, to some form of defined contribution scheme
- Follow the principle of taking the Bank of England out of politics by setting up a Pensions Commission that is totally independent of government, employers, unions and the insurance industry. Give it full authority to reform and manage a complementary, state and private sector retirement savings and pension regime that provides value for money.
Colin Harding is chairman of Bournemouth-based constructor George & Harding