An IEA study reveals the magnitude of private sector pension debt
The study also finds that, through short-sighted legislation, successive governments have added to the cost of final salary pension schemes, making them unattractive to employers and hastening their closure. In short, “the pursuit of the perfect has been the enemy of the good.”
The introduction of the Pension Protection Fund will also increase the cost of final salary schemes and may introduce a moral hazard for employers. Nick Silver comments, “If there is a serious economic down-turn a lot of companies could go under at the same time. These calculations show the extent of the deficits that would be revealed in some schemes were this to happen. It could put enormous pressure on the Pension Protection Fund. Ultimately the government or the tax payer may have to meet the bill.”
Nick Silver suggests a number of ways to reduce the burden of schemes and improve members’ security:
• Legislation which has had unintended consequences, such as statutory indexation and forcing buy-outs on closed schemes, should be repealed.
• Schemes should be allowed to change their structure so that trustees’ incentives are better aligned with those of scheme members.
• Market-based solutions such as tradable pension debt and debt/equity swaps should be encouraged.
*The trouble with final salary pension schemes by Nick Silver, 14th IEA Discussion Paper, The Institute of Economic Affairs.
** Nick Silver is a director of Silver Actuarial Services and is the lead consultant on the IEA Empowerment Through Savings project, sponsored by the Templeton Foundation.