Jeff Salway: Financial crisis takes an unfair toll on the private sector

Published on Friday 17 October 2008 22:42

THAT no-one really understands the long-term implications of the turmoil loosely labelled as the credit crunch is clear. Ask an estate agent and he or she will insist that the whole thing is a media creation anyway. Ask an economist and he or she will spell out a diagnosis that contradicts what they told you last time.

But there are exceptions where consensus prevails. One outcome that few in the pensions industry argue with is that it's another solid nail in the coffin of the private sector final salary pensions.

Research by Scottish Life found that nine out of ten independent financial advisers believe all private sector final salary schemes (which guarantee a pension equivalent of up to two-thirds of earnings on retirement) will be closed to new entrants within four years. The continued closure of final salary (also known as defined benefit) pension schemes is predictable – if you work in the private sector at least.

If you're lucky enough to be in a final salary scheme already, your pension has been protected from the market volatility that has taken chunks out of the value of millions of pension pots. But as events in the banking industry have so powerfully demonstrated, someone somewhere is absorbing the shocks.

In the case of final salary schemes it's the sponsoring employer, and their appetite and ability to continue offering such benefits is fast disappearing. While private sector workers fortunate enough to be in a final salary scheme are not at risk of losing their benefits – although future accrual of benefits may be threatened – more schemes are set to close their doors to new entrants.

The emphasis on the private sector is intentional. Among other things, the likely terminal decline in the ability of employers to provide final salary pensions highlights the widening chasm between public and private sector pension provision and raises fresh questions over the moral and financial sustainability of such a discrepancy.

While the government has contributed significantly to the problems besetting private sector pensions, it has done little to bring the public sector variety into the 21st century. As Dr Ros Altmann pointed out last month, the result is effectively a two-tier workforce, with the public sector enjoying the benefits increasingly denied to the rest of the working population.

At the end of last year, 2.7 million private sector workers were members of final salary pensions, down from three million the year before. Membership of public sector pension schemes rose over the same period, to more than five million.

Also consider that 90 per cent of those in the public sector have some form of company pension, compared with just 15 per cent in the private sector, and you have a perfect illustration of the need for greater pensions equality.

As the closure of final salary pension schemes in the private sector accelerates, MPs – celebrated beneficiaries of generous public sector final salary pensions – have to face up to the implications of persisting with a pension system that is out of bounds to anyone working in the private sector.

The Treasury also needs to clarify the real cost to the taxpayer of continuing to offer such generous public sector pensions, which is currently calculated using figures that are out of date and inaccurate.

ON A similarly inevitable note, is a reminder that this year's self-assessment tax ordeal needs to be completed by 31 October. Previously, paper self-assessment had to be filed either by 30 September or 31 January.

The good news is that the September deadline has gone, but if you want to continue filing by paper, the October deadline is the only one that applies, as of this year. The January deadline remains, but is for online filing only.