Why Have Private Pensions Been Decimated?

The constant excuse of Cameron and the government for
attacking public sector pensions is that workers in the private sector do not
have access to final salary pensions but have to rely instead on the
fluctuations of the money markets to provide the pension funds with enough
income to give to its members a miserly pension. But it was not so long ago
that the majority of private sector workers had the opportunity to enrol in
final salary schemes. It was only after 1998 that schemes started to close to
new members so that today only 15% of private sector workers are covered by
final salary schemes.

@font-face {
font-family: “Calibri”;
}p.MsoNormal, li.MsoNormal, div.MsoNormal { margin: 0cm 0cm 10pt; line-height: 115%; font-size: 11pt; font-family: Calibri; }div.Section1 { page: Section1; }

Why Have Private Pensions Been Decimated?

The question that is never asked is that if private pensions
are so bad for employers, why introduce them in the first place? After the
Second World War major companies started up relatively generous pension plans.
Such was the scope of these schemes that my father and uncle, on re-joining ICI
after 4 years of military service, were credited with those four years’ war
service for calculating the final salary pension. Just as the introduction of
the welfare state was used to head off any tendencies towards socialist demands
in post war Britain, industry had to be seen to be more socially responsible as
the effects of the 1930’s depression was still a real living memory for these
workers. Pretence was therefore needed to show that capitalism had changed its
ways.

The other source for change came with the rapid unionisation
in post war Britain as strike waves over pay and conditions spread like wild
fire. A bargaining tool used at
this time to buy off workers’ demands was the idea of a deferred pay in the
form of future pension, which was an easy option to offer. Another reason for
the introduction of final salary pensions was to act as “golden handcuffs”
tying workers to the job, because at a time of high employment employers did
not want to lose staff to other companies. As the pension is deferred pay if an
employee left for another job, the worker would lose all of the employer’s
contributions and would only receive a small proportion of the employee
contribution. If the worker left his pension in the company scheme to claim at
a later retirement date, it would be eroded away over time to be virtually
worthless. Paying pension fund contributions was at a time of apprenticeships a
cheaper option than recruiting a school leaver for a five year training
programme.

However, the main issue for such pension “generosity” was
that capitalism was expanding in post war Britain and the assumptions made by
the actuaries was that this expansion would continue and pay for future pension
pay-outs. What was never mentioned was how the pension funds worked. Workers
paid in their contributions and so did the employers. But where did the
employers get their money to pay in? The employers’ contribution came from the
same source as the workers’ contribution to the pension fund – from the workers
themselves. How was this possible? Through expending labour workers create
value but only get back part of the value they produce. The other part, the
surplus, is taken by the employers in the form of profit. Out of this surplus,
the profits, the employers make their contributions. The larger the
contributions, the smaller the profits left for dividends for the owners. Hence
today, with profit margins deemed by the employers to be not large enough, the
only way to have bigger profits is to cut the proportion of the surplus created
by workers that goes to the pension funds. And it is all done in the name of
affordability!

In the post war period with the growth of world trade and
capitalism from reconstruction and new markets, the size of the funds increased
year on year, so much so that a lot of employers took a contribution holiday in
the late 1980s and 1990s paying no money into the pension pot and leaving it to
workers’ contributions to maintain the funds. The pension fund was also a
source for the company to self-invest. No real auditing was in place to oversee
these raids on funds, which eventually lead to the catastrophic failure of
Captain Bob Maxwell’s Mirror Group pension fund due to fraud where all the
workers’ pensions had been used to prop up the failed expansion plans, leaving
the workers to rely on meagre state pensions.

In the 1990s the reasons for capitalism to provide private
pensions had vanished. No longer was it seen as a golden handcuff as levels of
unemployment grew and the training of young people was now the responsibility
of the state. Levels of 15-20% turnover were acceptable by companies who no
longer wanted employees to have long service but rather capitalism wanted
casualisation of labour as temps, agency and contract staff were replacing
permanent workers, and companies like Fords spun off parts manufacturer
Visteon. This was all part of the
super exploitation of workers; companies could save around 7% of the pay bill
by getting rid of pension schemes, a cut in deferred pay, hoping that workers
would not notice. However, where
workers were still union organised the companies did not get away with it. Workers
in former state owned industries that had been privatised held on to final
salary pensions.

In the late 1980s I worked for a Swedish manufacturing
company in the Northeast that was introducing a final salary pension scheme and
my job was to recruit all the workers into the scheme and persuade them to give
up 5% of their pay in return for a decent retirement pension. I was successful
and enrolled 99% of the weekly paid staff and 100% of the salaried staff. I remember some of the propaganda
produced such as a poster with one photograph of a pensioner wrapped up with a
blanket huddled over a single bar electric fire, whilst the other photograph
showed a pensioner in a bar in Spain with the strap line, “Your future. The
Choice is Yours”. Unfortunately, today the cold pensioner is going to be the
dominant image with no choice.

As a
pension takes 40 years to mature, the question to be asked of capitalism is; if
you are so sure that your economic system is the best and will last forever
with growing prosperity, why can you not afford final salary pensions? We all
know the answer. Capitalism can no longer look beyond 40 days never mind 40
years!