Pension Crisis in the UK
The United Kingdom has often been celebrated for its effective pension system, whereby citizens are guaranteed a basic pension from the state and encouraged to save independently to ensure their financial security during retirement (see State Pensions). Many large companies offer their employees defined benefit schemes (see Defined Benefit Schemes), which promise members an agreed amount of pension on retirement. Stakeholder pension schemes (see Stakeholder Pensions), offered by most high street banks and building societies, enable members to save regularly and flexibly, and so build up a pension fund that can provide them with an annual pension on retirement. However, the system has been the subject of criticism and negative publicity of late as a series of serious scandals called its reliability into question. Public faith in retirement schemes has fallen and members of pension schemes have all been forced to ask themselves, 'how secure is my pension?' This pension crisis, or rather crisis of faith in pensions, can be traced back to two catalysts: economic factors and public scandals.
Economic Factors
Economic factors have resulted in many Occupational Pension Schemes having to rethink their rules and promises. In the nineteen eighties occupational defined benefit schemes, where your employer promises you a certain amount of pension on retirement, were very popular. Investment returns were high and employers were confident that they could cover the cost of paying their members' pensions. From the nineteen nineties onwards investment returns began to fall and life expectancy continued to increase. The cost of paying members' pensions for longer, with less opportunity to make money through investment, caused many occupational pension schemes to close and left members without the financial security they had been promised. Similarly, at the beginning of the twenty-first century, a spate of occupational pension schemes went unpaid when the employer became insolvent. Members were left without their promised pension and were forced to face a retirement without their occupational pension income.
Economic factors have also caused the government to review the State Pension system on a regular basis. The State Pension reviews have often resulted in changes to the system, which in turn have led to some reductions in the amount of State Pension that people are entitled to receive on retirement. Governmental changes such as raising State Pension Age, adapting the State Second Pension scheme, and increasing pensions in line with prices and not earnings are all unpopular. Many people are afraid that they will work all their lives only to face an impoverished retirement caused by an insufficient State Pension.
Pension Scandals
There were four main pension scandals which tainted the public image of the pension system. The first, beginning in the nineteen fifties, involved the insurance company Equitable Life. Over several decades, Equitable Life sold pension scheme memberships which guaranteed a certain amount of annual pension on retirement. Unfortunately, the money required to honour these promises was not available, and in the nineteen nineties the company had to admit to a total funding shortfall of many millions of pounds. An independent government enquiry into the case was made by Lord Penrose, who found in 2004 that Equitable Life was responsible for causing its own pension crisis. Many scheme members saw their promised pensions reduced and the general public became aware that a seemingly secure and successful company can suddenly reveal a myriad hidden financial secrets.
The second large scandal to affect the pension system began in the nineteen eighties, when a large number of pension scheme members were convinced to leave their defined benefit schemes in favour of defined contribution schemes (see Defined Contribution Schemes). Members were often convinced by financial advisers keen to earn commission from the pension transfers, although these transfers often left the customer with fewer benefits. An ongoing enquiry began in nineteen ninety-four, and concluded that pension mis-selling had affected over one million people; to date it is estimated that over eleven billion pounds has been paid in compensation to people who were wrongly sold an alternative pension scheme.
Most recently, a spate of companies claiming insolvency has resulted in several pension schemes' promised pensions going unpaid. Pension schemes which prove underfunded must be topped up by the employer when needed. If the employer has no money to do this because they are insolvent, the pension funds face a shortfall in funding which results in a failure to pay members the pensions they were initially promised. Thousands of people were left with a severely reduced occupational pension when underfunded schemes wound up at the beginning of the twenty-first century. The government has since set up two schemes intended to assist members who lost pension money when their employers became insolvent and their occupational schemes failed. It is possible for members to gain compensation through these governmental schemes, but confidence in the pension sector has inevitably been reduced.
Perhaps the most famous UK pension scandal of all came to light in nineteen ninety-one, when it was discovered that Robert Maxwell had taken four hundred and fifty million pounds from the pension funds of his employees. Robert Maxwell was a media tycoon, owning several publishing companies and in turn head of Mirror Group Newspapers whose publications included the Sunday Mail and the Daily Mirror. His thousands of employees had paid into pension funds totalling many millions of pounds, and investigative journalists accused Maxwell of having stolen money from the schemes. In nineteen ninety-one, Maxwell died in somewhat mysterious circumstances; it is assumed that he fell from his yacht and drowned. He left his two sons with bankruptcy debts of over four hundred million pounds. Thousands of employees were left with smaller pensions as a result of Maxwell's fraud, and the scandal sent shockwaves through the occupational pension market as employee confidence crashed.
For more details see How real is the Pension Crisis?
