In the area of pensions we are hearing a great deal these days about attempts of the capitalist class in effect to lower wages by reducing or eliminating what they contribute to their workers’ retirement pensions. The general crisis of capitalism is causing capitalists to cut wages – but slyly they are not for the most part attacking that part of workers’ remuneration that comes in the pay packet, but benefits that are less immediate, i.e., those paid for by the state out of that part of a worker’s remuneration that is handed over in tax, and, most recently, pensions.
Even before the current collapse of world stock markets, companies had already been engaged for some years in economising on the pension front, in particular by moving away from what are known as final salary schemes (where the retiring worker’s pension is a proportion of his final salary) towards what are known as defined contribution schemes, where the retiring worker’s pension is based on the then value of his pension savings in the scheme. By changing schemes, employers can cut their contribution by as much as 9%.
According to The Economist of 28 February 2002, “Last year, a tenth of final-salary pension schemes surveyed by the National Association of Pension Funds … closed them to new employees. Such closures, including major employers like British Telecom, have not affected existing members. However, in recent weeks, Iceland, a frozen-food retailer, and Ernst & Young, an accountancy firm, have announced plans to close their DB [‘defined benefits’ – employer risk] schemes to existing members” (‘End of the party’). In future the most many employers will be prepared to do will be to put aside money for each employee’s retirement, invest it on the employee’s behalf, and then on his/her retirement purchase an annuity for the employee in question. How much that annuity will be worth – how much pension in effect the pensioner will receive – will depend on the value of that employee’s pension fund as at the date of retirement and on the then cost of annuities. If the shares in which the pension fund is invested have fallen in price compared to the price at which they were purchased, or if annuities are expensive, then the pensioner will suffer. Already in 1999 the Economist was noting the trend away from ‘final salary’ schemes. Commenting on the fact that Sainsbury’s had been encouraging staff to opt out of the company’s final-salary pension plan, but that at that time only 2,000 of the company’s 140,000 staff had done so, the Economist went on to say:
“Sainsbury’s is not alone. Companies everywhere are trying to offload the burden of retirement planning on to their staff. This involves switching from the traditional ‘defined benefit’ or ‘final salary’ schemes – which guarantee employees, say, two-thirds of their final salary for life after they retire – to ‘defined contribution’ or ‘money-purchase’ schemes that make no promises at all about the ultimate benefits. Usually, employers will play some part in managing these plans, although that part is shrinking. Eventually, employees may find themselves looking after their pensions all on their own.
“This trend, though not universal, is worldwide and pronounced… In some countries, such as Hungary, the Czech Republic, Thailand and Denmark, money-purchase plans already dominate occupational pensions. In America, Australia, Switzerland and Spain, such plans have passed final-salary schemes in number or volume and are growing. In Britain, the trend is still in its infancy, but research … suggests that most Britons expect their company to switch to money-purchase or personal pension schemes” (‘Passing the buck’, 13 May 1999).
We have become quite used now to the bourgeoisie as it chips away at our benefits telling us how much better off we are going to be as a result. Typically it tries to glorify the individualised pension as ’empowering’ of the individual worker who can now ‘control’ his pensions savings. Even The Economist, however, cannot avoid admitting “there is a downside. The benefits of money-purchase schemes come only to those ‘modern’ labourers who change jobs often. Those who stay with one employer for a long time would still be better off in a traditional final-salary scheme. Raj Mody at Bacon & Woodrow estimates that a money-purchase plan member who works at the same company for 30 years can expect to get only half the pension he would have done under a final-salary scheme…
“More worryingly, there is evidence that people left to their own devices with a personalised pension will not save enough. A rough rule-of-thumb, says one actuary, is that it takes a pot worth about nine times final salary to buy an annuity of about two-thirds of final salary. But an average American who has been saving for three decades … will accumulate a pot of only 1.6 times salary…”
Effect of stock market falls
By August 2001, The Economist was pointing out the dire consequences of falls in share prices on the ‘defined contribution’ pensions. On the one hand pensioners’ retirement funds had fallen considerably in value, as measured by the market price of their holdings, and on the other hand, the cost of annuities had risen as a result of greater longevity:
“On August 15th , William M Mercer, an actuarial consultancy, warned that members of DC [‘defined contribution’ – i.e., pensioner risk] schemes were likely to face ‘significant shortfalls’ in their retirement benefits. Its calculations showed that projected pension benefits had halved over the past ten years. A 30-year old entering a DC scheme in 1991 with a contribution rate of 10% of earnings could expect to get a pension of 55% of final salary at 65. His counterpart today could hope to get only 24%. Contribution rates need to increase to 15-20% of pay, says Jonathan Gainsford, a partner at the firm” (‘Save or else’, 16 August 2001).
Less than 6 months later, The Economist was talking about a need for even higher levels of contributions: “For a man to ensure two-thirds final-salary pension at the age of 65, contributions into a DC stakeholder plan now need to be 24% of earnings from the age of 25” (‘End of party’, 28 February 2002).
Unions fight back
In the past few months unions have woken up to what is happening and have managed in some cases to organise to fight back successfully against planned closure of final salary schemes, though they have compromised by agreeing to higher contributions being made by workers to the schemes in question. Thus, what appears to be a concerted effort to close final-salary schemes throughout the steel industry has been to some extent frustrated by a successful campaign of one-day strikes by the ISTC (Iron and Steel Trades Confederation) against Caparo, the steel and engineering firm owned by Labour supporter Lord Paul. Corus, who had been rumoured to be closing their final salary scheme, started announcing that it had no such intention. RMT has also successfully fought an attempt to downgrade pensions of 300 Isle of Wight ferry workers.
Other unions too are considering putting up a bit of a stand. Insurance companies such as Prudential and Scottish Widows are trying to economise on pensions too, but the union Amicus-MSF, which has been negotiating to try to prevent this, seems to be willing to call Prudential staff out on strike if necessary to defend their pension.
Unfortunately these cases are exceptional. Hundreds of employers have gone over to DC schemes over the past few years – for instance, British Telecom, Tesco and Safeway. According to The Economist of 28 February 2002 (‘How bad for employees is the decline in final-salary pensions?’):
“Last year, a tenth of final-salary pension schemes surveyed by the National Association of Pension Funds … closed them to new employees. Such closures … have not affected existing members. However, in recent weeks, Iceland, a frozen food retailer, and Ernst & Young, an accountancy firm, have announced plans to close their DB [‘defined benefits’, i.e., ‘final salary’] schemes to existing members.”
Nevertheless, since becoming aware of these manoeuvres, which overall tend to affect better-off strata of workers, since the low-paid are rarely in any kind of pension scheme, some alarm and thoughts of insubordination have spread throughout the union movement. John Monks, General Secretary of the Trades Union Congress, is reported in The Independent as saying that while he was not generally in favour of strikes, “on protecting pensions I’m very much a militant” (quoted by Nigel Morris, 21 October 2002, ‘Pensions ‘could be Labour’s poll tax”).
In its anxiety to help British capitalism survive, Labour is reputedly even turning against well-paid workers with incomes high enough to bring them into the 40% tax bracket, and is apparently considering removing the tax break paid to 2.8 million top-rate earners on their pensions investments. That would put the cat among the pigeons! It remains to be seen whether Labour will go ahead with the proposal when it brings out its Green Paper on pensions due later this year.
If for some years employers have been closing down ‘final salary’ schemes in order to save some 9% in pension contributions, this is not the only way in which pensions have been hit recently. They have also been badly affected by corporate insolvencies on the one hand, and the downward spiral in the value of the investments held by the pension funds.
According to Tony Tassell and Alexander Jolliffee in the Financial Times, (FT.com site, Aug 28 2002):
“UK legislation is allowing businesses to walk away from obligations to their pension funds…
“Many workers at companies that have gone bust are finding they have lost their built-up pension savings. …
“When companies wind up schemes, they do not have to guarantee the pensions that members have earned to date. They have to provide only a transfer value for the cash equivalent of the pension, worked out according to a solvency test called the minimum funding requirement [MFR].
“Members must have a chance of taking the transfer value elsewhere and getting the same benefits as they would have done under the scheme.
“But if they take it to the most likely manager of such assets – an insurance company – they generally find it will buy significantly fewer benefits. This is because insurers work out benefits on a more cautious basis than used in the MFR.
“Members may get only 60p to 80p in the pound and even then it can take years for the wind-up process to be completed. In a few extreme cases, where companies go bust with insolvent final salary pension schemes, people can lose their pensions entirely.”
It is difficult to get information about companies so affected, but one that has been in the news recently is ASW, another steel works, which went into receivership last July. 900 employees at ASW’s Cardiff plant, besides being made redundant, have been told they will not be getting the pensions to which they have been contributing throughout their working lives. Jeff Prestidge in the Daily Mail of 13 October 2002 (‘Former Steel Firm Workers to Confront British Politicians over Pension’), cites the case of a worker from ASW’s Isle of Sheppey plant (whose 300 workers are not losing their jobs as yet, but will lose their pensions):
“Like 35 per cent of his fellow-workers, he has worked at Sheerness for more than 25 years. With more than 28 years’ membership of the pension scheme behind him, he was looking forward to retiring in four years, when he would have been entitled to a pension of more than half his final salary.
“Instead, John now finds himself facing an uncertain future and a retirement of financial struggle.
“He says: ‘What annoys me most of all is that it is the most loyal workers who suffer most in wind-ups. We never walked out during the big steel strike in the early Eighties, and at the time we were praised by Margaret Thatcher for standing up to the picket line bullies.
“‘We also helped make Sheerness one of the most efficient steel plants in Europe. And last but not least, we did what our employer advised us to do and staked our financial future on the company pension scheme.
“‘Now it is being wound up, we feel that we have been robbed. The 4.5 per cent of our salaries that we paid in, month in and month out, to secure our pension benefits has simply been swallowed up in a black hole.'”
The article goes on to mention by name some other companies which have wound up their pension schemes at the expense of employees:
“The workforce at engineering giant UEF has suffered a similar fate, as have others throughout the shrinking manufacturing sector.
“More controversially, some companies have also wound up schemes without even facing the threat of going into receivership.
“Labour peer Lord Paul has done it to the scheme at the automotive division of his Caparo Group.
“And the British workforce of international shipping company Maersk have discovered that they could lose more than 60 per cent of their pension entitlement with the winding-up of their fund.”
Threat of default
The above are cases where it is the insolvency of the companies, or threatened insolvency, in their trading operations that has led to them cheating their workers of the money they have saved in company pension funds. However, companies are also threatening to default on their pension payments because the funds that they have set aside for payment have reduced significantly in value as a result of recent market slides.
In the article of 16 August 2001 quoted above, The Economist points out that “A report on August 13th from Bacon & Woodrow, another firm of actuaries, highlighted these risks. It found that 17 schemes offered by Britain’s top 100 companies were under-funded – up from 7 last year.”
The Economist draws an uncomfortable parallel with the time of the Wall Street crash in 1929. The economic climate preceding the crash had caused employers to flock to money-purchase pension schemes. “At the time of the great Wall Street crash of 1929, 10,000 companies in America had defined-contribution plans in place (although not in their present form). By the end of the Great Depression, only 300 of these plans had survived…” (13 May 1999, op. cit.). With the current slide in share prices, which must continue to slide considerably further before prices fall to the historical level of share value, it appears likely that whatever the pension scheme, pensioners are going to find themselves short changed.
These problems of underfunding are often caused by the fact that many employers artificially boosted their profits during the period when share prices were soaring sky high against their true underlying value by taking ‘pensions holidays’, i.e., not paying in the required employers’ contributions on the grounds that the fund already had more than enough in assets to meet pension payments, if, of course, one made the assumption – which today has once again been proved to be completely unjustifiable – that share prices will only go up and never go down. For example, Unilever (which owns Walls and Persil among many other brand names) has announced the end of a seven-year contributions holiday for both staff and the company in the final salary pension scheme. Workers will start making contributions of 2% in January, rising to 5% in 2004. Had the ‘pensions holidays’ not been taken then although the pension funds would still have lost money, there would nevertheless been sufficient underlying assets left in most of them to meet their obligations – or at least there would have been far more than there are now. Similarly, it became routine in the last 10-15 years to offload redundant staff onto their pensions schemes by allowing them to take early retirement and claim their pension from the age of 50 or 55. This obviously reduced the money that would otherwise have had to be paid out of profits in respect of redundancy payments. It also enabled to government to massage its unemployment figures, since the huge army of the early-retired do not count as unemployed. Nevertheless, it placed a major burden on the various company pension funds that they were never designed to bear.
Destitute pensioners damage the economy
The result of depriving hundreds of thousands of pensioners the world over of their pensions, or a substantial portion of their pensions, will of course be a drastic decrease in spending power, and this in turn cannot but mean a steep decline in demand for all the goods and services that capitalism puts on offer. Fewer sales means more bankruptcies still, a further twist in the spiral of overproduction and crisis.
Threat of systemic failure
Another massive threat to pensions – and indeed to jobs, public spending and everything else – is the possibility of failure of the insurance companies through whom very many pensions are provided. That there is a real danger of this is signalled by, among others, Patrick Collinson in The Guardian of 5 October, 2002 (‘Financial viability: Know the score: How the groups are rated out of 10: The insurance companies that manage your savings have been put under the spotlight by a top analyst’):
“An explosive new report by one of the City’s most respected analysts today reveals the endowment and pension companies most damaged by the slide in stock markets – and the ones with enough reserves to battle through the bear market.
“The report, Life 2002 by Ned Cazalet of Cazalet Consulting, makes grim reading for anyone with policies at Alba, Sun Alliance, NPI, MGM Assurance and Sun Life. All scored just four out of 10 or less on Mr Cazalet’s ratings for financial strength.
“Neither is there a lot of comfort for savers with GE Pensions (formerly NML), Winterthur and even Friends Provident which Mr Cazalet scorns as ‘under capitalised, even by its own standards.’ …
“The latest slide in stock markets, with the FTSE 100 dipping below 3,700 once again, reignited fears about the financial stability of insurance companies which manage the endowments, pensions and with-profit bonds for millions of savers.
“The Financial Services Authority took the unusual step of intervening this week to calm fears about the imminent insolvency of insurance companies. It said that big life insurance companies had ‘significant ability to withstand further large falls in equity values’ from a level of 4,000 on the FTSE 100 index.
“The FSA’s move followed fresh concerns about Equitable Life and action by many insurers, such as Standard Life, to cut payments on policies to preserve their financial strength. Other companies, such as Legal & General, have tapped their shareholders for new cash to boost their financial position.
“Customers of Alba, who mostly bought their policies when it was the insurance division of Britannia Building Society, and Sun Alliance & London, are in the invidious position of having the same solvency score as Equitable Life.
“Mr Cazalet says Alba has a safety reserve of just pounds 62m above its £1.74bn in liabilities, while Sun Alliance & London has a margin of £442m above its pounds 6.1bn in liabilities…”
As insurance companies find themselves in such difficulties, one effect is that they are forced to sell equities, meaning that massive numbers of shares are put up for sale on the world’s stock markets. This leads to still greater oversupply in relation to demand, and more crashing of share prices to the point where there is systemic failure in the capitalist economy. The Financial Times remarked that just as an opera isn’t over until the fat lady sings, an economic depression requires the failure of a major bank or two, with all the chaos that would ensue. It goes without saying that all insurance companies, such as those mentioned above, which are in a precarious position already, will finally hit the rocks and sink, depriving millions of people of the pension rights – their lifetime savings.
The bourgeois press would have us believe that this sudden degeneration of pension provision that everybody had thought to be safe is due solely to collapsing equities markets all over the world. This is only a half truth. The part of the story that is left out of account is that throughout the period of economic decline that started in the early 1970’s every excuse has been used to cut the payments made by employers into pension funds. In addition, to keep tax and national insurance contributions low, the state pension has been steadily declining in value, and many years ago the government reneged on its undertaking to increase state pensions in line with increases in average earnings – which has led to today’s state pension in the UK being some £25 a week less than it would otherwise be. In 1978, the basic pension if you had a full contribution record, was something like 22 per cent of average earnings. The basic pension is now about 15 per cent, and because it’s not earnings-linked but price-linked, that percentage will fall. Again this cutting of state pensions is a worldwide phenomenon, as the Economist also mentions in the above-quoted article:
“Governments, feeling the pinch of providing for ageing populations, are themselves looking for ways to shift responsibility to individuals. Singapore and Malaysia, for instance, have opted for defined-contribution public-sector pensions, Chile and Argentina for defined-contribution private-sector pensions with individual accounts. Italy and France, too, are thinking about moving away from a state-run to an individual-run system.”
It is against this background that we need to consider the current crisis in pension funding that has come to the fore in connection with the massive falls in stock exchange prices that have come about in the last three years. We are being told that the cause of the pension short fall is the fall in the stock market, and of course that it is only fair that the workers should bear the loss – for if their former employers are forced to make good the shortfall, why then these companies will become uncompetitive and go out of business. While it is quite possibly true that many companies would go out of business if they were forced to honour their pension commitments, this is hardly all there is to it. What about the pensioners who will starve or die of cold if their pensions are not paid: are their concerns not at least as important?
This is a perfect confirmation of Marx’s observation that the worker goes to the wall if capital is doing well and he goes to the wall is capital is not doing well!