UK MP sees firms going “nuclear” on pensions

BELGIUM - An increasing number of UK companies could be pressing the nuclear button on their pension schemes, predicts Labour MP Frank Field, who believes that pensions issues could be the dominant theme in the next British general election.

“What we are seeing is that the parent companies of pension schemes, which have delivered the biggest welfare success story of the last 100 years, are beginning to decide what they can deliver, as they are facing huge deficits on their pension schemes,” he told the Global Ageing Conference in Brussels yesterday.

These deficits are a growing proportion of the capital value of the sponsoring company, in some cases they are equal to half the current value of the company, he explained. This made it difficult to discuss pensions in a long-term framework.

Companies were attempting to make a number of changes to mitigate the deficits, he said, such as closing their defined benefit schemes to new members, but the cost savings were usually minimal. “Companies were looking to change final salary schemes to average salary arrangements.”

Some companies were increasing contribution rates for members, resulting in employees taking a cut in real wages to do this. Another approach was to close the scheme entirely to existing members.

“When meeting the bureaucrats responsible for running the very large schemes, I get the same feeling as I guess there was when the royal houses of Europe gathered together for their social events prior to World War I, with no idea as to the numbers to be wiped out in the next four to five years,” he said. “We could be seeing a similar transformation in company pension schemes.”

Pensions in the UK would now be consumed with the short term was due to the destabilizing effect of the growing deficits. The companies in trying to meet those deficits would be declaring a “dividend increase freeze for the foreseeable future and beyond”.

He pointed out that the Prudential was hit by losing market value when taking such a step, so there are limits to what companies can do to use their own finances.

“Another reason why the nuclear button was going to be pressed by an increasing number of firms at some stage was the increasing competition both from eastern Europe and China,” he said. What sponsors would do when facing the gear change in the degree of competition is looking at how to cut costs. “Their eyes will fall on pension costs, one of their largest.”

He also pointed to the downgrading of credit ratings because of their pension position. “So firms’ ability to raise new capital in order to expand and survive is being limited. As they move towards junk bond status, the issue of what to do with pension schemes is going to increase.”

Looking at the political implications for the UK’s system built on low state pension provision and more generous private company schemes, he said: “The government is beginning to suggest to people that they will need to save more or work longer as being the only solution.” He did not see the electorate being happy about this.

In the election of 1997 that brought Labour to power, the over 45s were only 40% of the electorate, but they comprised 60% of those who actually voted. He predicted that at the next election those over 55 would be responsible for over half of the votes cast.

“We may be seeing politics beginning to change in a most fundamental way in Britain, from one based on class to one based on age.” Field sees age replacing class. “In the coming election, pensions will probably be the main issue.”

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