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Final Salary Pensions Reach 'tipping Point'

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http://www.thisismoney.co.uk/pensions/arti...e_id=6&ct=5

Final salary pensions reach 'tipping point'

Philip Scott, This is Money

13 August 2009

For the first time FTSE 100 firms' final salary pension schemes are spending as much on previous employees as current staff.

The news, in a report from consultancy KPMG, gives a clear illustration of how unaffordable gold plated pensions have become for big companies.

Final salary pensions are based on earnings at retirement and years of service, as opposed to stock market performance of investments.

Consultancy KPMG, in its fourth Annual Pensions Repayment Monitor Survey, also found that among the UK's top 100 firms, it is anticipated that within five years former worker payments will outstrip those to present ones by a ratio of four to one.

This would mean that £4 of every £5 spent on pensions will be for past liabilities, not new benefits.

In stark contrast, the normal ratio between current and former employees should be 2:1.

KPMG pensions partner Mike Smedley says: 'It is unprecedented for companies to be spending as much or more on their pension benefits for previous employees than for current staff.

'The fact that we are now reaching this point graphically illustrates the increasing unaffordability of defined benefit schemes.

'Unless companies and their pension scheme trustees can work together to ensure that pension funding can be managed in a way that does not impact on companies' wider financial flexibility, this is likely to result in more and more companies opting to close schemes altogether.'

With a raft of final salary scheme closures already this year, 2009 has displayed all the hallmarks of a watershed year for beleaguered gold-plated pensions.

Over 2008, significant falls in world stock markets contributed to increases in pension deficits. At the same time the economic downturn has seen revenues and company asset values fall. Household names including Barclays, BP, Morrisons and IBM have all announced that they are axing their final salary schemes this year.

Between end 2007 and the end of 2008, aggregate disclosed FTSE 100 deficits doubled from around £20bn to £40bn and KPMG estimates that at the end of June this year, the black hole could have doubled yet again £80bn. Faced with increased funding pressures, many companies are re-evaluating the validity of supporting final salary pensions and KPMG believe that many will conclude that such schemes are no longer feasible.

Earlier this year, another major consultancy PriceWaterhouseCoopers concluded that final salary pension schemes were 'unsustainable'.

KPMG's report also found that the ability of FTSE 100 companies to repay deficits out of discretionary cash flow has deteriorated in the 2008 financial year, compared with the position in 2007. It said 22% of firm face no prospect of clearing pension deficits over any reasonable time period - the highest level in three years, and up from 15% last year. Just 12 companies now show an accounting surplus, compared with 21 the previous year.

Smedley added: 'Businesses may now be forced to substantially increase funding. Many trustees, encouraged by the Pension Regulator, are taking a more cautious view of future returns than the accounting measure. This pressure to add further prudence at a time of economic downturn, and the risk the schemes represent to companies is resulting in companies re-evaluating the validity of defined benefit pensions.'

I wonder who it was who removed tax relief for pension dividend payments?

It's over folks. Save every penny you'll ever need, 'cause the 7-10% compounded growth rates on which your retirement was based are no more.

Edited by AvidFan

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http://www.thisismoney.co.uk/pensions/arti...e_id=6&ct=5

Final salary pensions reach 'tipping point'

Philip Scott, This is Money

13 August 2009

I wonder who it was who removed tax relief for pension dividend payments?

It's over folks. Save every penny you'll ever need, 'cause the 7-10% compounded growth rates on which your retirement was based are no more.

Was it John Major? I wonder who it was who said employers could take pensions holidays because they had plenty of money in their funds and that instead of funding pensions properly this money could be frittered-away on bonus payouts to shareholders?

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People are living an average of 10 years more than the in 1950s, but retiring at the same age. Unsustainable. Save up more, work longer or live more frugally when you retire. Some of the old folks who lived through the war can astound you with 'recycling' a lot moe than the so-called green generation who spend more in a restaurant on one meal than most people spend on food for an entire week.

It's the ones who still have debts when they retire that struggle. Whether it was their choice or they were 'persuaded' to take out debt that extended beyond working age, ah well........

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People are living an average of 10 years more than the in 1950s, but retiring at the same age. Unsustainable. Save up more, work longer or live more frugally when you retire. Some of the old folks who lived through the war can astound you with 'recycling' a lot moe than the so-called green generation who spend more in a restaurant on one meal than most people spend on food for an entire week.

It's the ones who still have debts when they retire that struggle. Whether it was their choice or they were 'persuaded' to take out debt that extended beyond working age, ah well........

Agreed. There is a changing demographic and the capacity of the current generation to sustain those retiring now is limited - partly because this generation has had fewer children because of over-priced housing in the 1980's.

The notion that the pensions issue can be pinned on Gordon Brown alone is facile. It may serve as an explanation for Daily Mail readers (who seem to have difficulty grasping complex/paradox/counter-intuitive arguments) but those who have thought about it a little more carefully recognise that there has been poor planning by successive governments over several decades.

We need an honest debate about pensions, about the working age, and about people's retirement expectations. We need a system which rewards proper planning, which penalises the spendthrift and the frivolous but which ensures that a minimum standard is sustained. Equally, we need a debate which ensure there's proper care for the elderly.

Part of the reason why we had a property boom in the first place was because of the poor returns on pensions. Facile, uninformative postings offer nothing to anyone - except to keep the gullible in line with fear of the bogeyman.

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The prime objective of pensions has been lost sight of- to provide a reasonable level of support for people in their old age. They are now a system of defered earnings and as such, disproportionately favour high earners.

These same high earners will live longer than those on lower incomes.

Therefore, the burden of pension provision is skewed in favour of those who can most easily make their own provision for old age.

The solution is remarkably simple, cap pensions at the level of the average wage. This will not prevent high earners from making additional provision, just prevent them from taking a tax benefit to do it.

I will guess, but expect with confidence, that to most pension funds the main burden is the top 15% by number of pensions they pay.

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