he Pensions Bill had its Second Reading on 17 January 2007 and is currently going through the Committee stages. Upon becoming law it will restore the link between earnings and the state pension, subject to affordability. It reduces the qualifying payments of the National Insurance Contributions to enable people to draw the full state pension. In addition, subject to an opt-out, it urges employees not already in an occupational scheme to put 4% of their salary in 'personal accounts, with employers providing 3% and the tax collector adding another 1%.
Industrious proposals, except that the Bill does nothing for today's pensioners and little for future pensioners. It fails to tackle the root causes of retirement insecurity. These are inequalities in the distribution of income, wealth and the looting of people's savings by the financial services industry. As a result it fails to provide any long-term solution.
Executive pay inflation
At Britain's 100 biggest quoted companies, executive pay is increasing 17 times faster than average pay. For every £100 earned by a top company director in 2000 they earned £205 (after allowing for inflation) in 2006, while ordinary employees have seen an average increase of only £6 (after allowing for inflation) in every £100. In 2005, FTSE100 directors pay rose by 28% compared to average earnings rise of 3.7%. In 2001 the average FTSE100 chief executive's total remuneration stood at £1.7 million, equivalent to the annual average earnings of 90 workers. By late 2006, it had risen to £2,864,282, equivalent to the average wage of about 127 workers, frequently for mediocre and below par performance.
In 2006, the median earnings for all employees were £23,600 per annum (compared to £22,900 in 2005). 75% of all workers had a gross annual wage of less than £29,000. Top 10% had earnings of over £886 per week (around £46,000 a year), while the bottom 10% earned less than £244 per week (or £12,700 per annum). Despite record profits, employees at Tesco have an average annual wage of only £11,594. Those at the Fashion store Next have average earnings of only £10,306. Many households have to rely on two incomes and employees have to work overtime, or even take on additional part-time work to make ends meet. Around 5.3 million workers, including home, migrant and temporary workers, earn below one third of the median hourly wage. Full-time female workers on average earn 17% less than men in comparable jobs. None of this enables people to save for pensions or make decent contributions to a pension plan.
Ordinary folk can't dip into some reservoir of savings either because they have so little. Government statistics show that after excluding the value of their dwelling, the top 1% of the population owns 34% of the wealth. The top 50% own 99% of the wealth. The share of the poorest 50% has declined to just 1% of wealth. 23% of the adult population has wealth of less than £5,000. A large proportion of the population is in no position to save for pensions or live-off savings in retirement.
Directors of FTSE100 companies receive pensions worth up to 40 times more than those of their staff. A typical director of a FTSE100 company can look forward to a pension of £168,000 a year, equivalent to more than £3,200 a week and also expect to retire early. This compares to an average of £7,124 a year for the staff in their companies, whose retirement age is being extended by the Pensions Bill to 68.
By world standards Britain is a rich country but the state pension of £84.25 per week (£4,381 per annum) for a single person and £134.75 per week (£7007 per annum) for a retired couple is virtually the lowest in Europe. Citizens of Austria, Hungary, Italy, Spain and Turkey Greece, Portugal, France, Slovenia, Estonia, Latvia, Slovakia Germany, the Czech Republic receive higher state pensions, measured as a percentage of average earnings, than UK citizens. In principle, this could be topped by occupational schemes, but only 40 per cent of today's workers (11.3 million) are members of an occupational scheme and the numbers are declining. Companies are now forcing employees to pay higher contributions for lower pension payouts, all to boost profits and executive rewards.
With low wages, only 35% of women are able to save for a pension of their own. The percentage of the UK population saving adequately for retirement has fallen from 55% in 2005 to 46% in 2006, while the number unable to save for pensions rose from 17% in 2005 to 28% in 2006. Social security cash benefits make up 60 per cent of gross income for the poorest fifth of households and 36 per cent for the next group. Even before the recent closure of many pension schemes nearly 3.03 million pensioners (2.5 million households), including over 2 million women, rely on social security benefits (or pension credits) to support them. In 2003/4, single women pensioners had a median income of £141 per week whilst men had £164 per week.
Following huge government support for pensioners, the median net income before housing costs of pensioner households headed by someone from a white ethnic group reached £204 per week in 2004/5 compared with £185 and £151 respectively for those headed by black and Asian pensioners.
Some 2.5 million pensioners still live below the poverty line, or £128 a week per pensioner in 2006. Around 1.4 million pensioners survive on £5,000 or less a year, which averages to just £3,000 per year or £8.49 a day after local taxes, water and electricity bills. 38% of UK pensioners have an income of £10,000 or less and more than 50% live on £15,000 or less annually.
With the erosion of occupational pension schemes, the position of future pensioners will be much worse. If anyone manages to save, the financial services industry steals their money, as evidenced by the pensions mis-selling, endowment mortgages and numerous other scandals. No company or director has been prosecuted for selling dubious financial products but the government proposes to hand over the 'personal accounts' to the finance industry with no safeguards, changes in regulation or rights for the savers.
The only viable solution to the pensions crisis is to provide a decent state pension for all. That should not be less than 60% of the median earnings and needs to be funded through progressive taxation and redistribution of wealth. UK companies are amongst the most profitable in the world. For 2006 the average profitability of non-financial UK sector is estimated to be at a record 15.2 per cent, with the services sector achieving 19.3% and the oil and gas sector at 42.9%. Between 2003 and 2006, the top 100 companies doubled their profits. Part of this should be used to fund better state pensions. The UK employers' national insurance contributions amount to about 9.6% of the labour cost compared to 18.8% for the EU, 15.2% for the OECD countries and the equivalent figures for France, Italy, Belgium and Austria average at 29.7 %, 24.9%, 23.3% and 22.6% respectively. So employers need to pay more.
Britain currently loses between £97 billion and £150 billion of tax revenues each year, due to organised tax dodging. Companies devise dubious tax dodging schemes, book their profits in tax havens and run rings around the Treasury through their coteries of advisers. Corporate taxes now barely account for 3.2% of the total UK tax take, almost the lowest ever. Britain boasts around 54 billionaires who last year had an estimated income of £126 billion. They paid only £14.7 million in income tax rather than the £50 billion that they should have. The government has been far too timid to effectively tackle tax dodging and dealing with these two factors above alone would go a long way towards good state pensions for all. We can go further and introduce higher rates of income tax for those earning more than £100,000 a year and raising the upper limit on national insurance contributions so that the rich pay more.
Fat cat pay vote
All this should be accompanied by steps to democratise big business. Workers should have representations on company boards and an active say in how the wealth is to be shared. They should also vote on executive salaries. If the fat cats deserve it that's fine. We also need to introduce the concept of a 'maximum wage' so that no director can earn more than ten times the average wage in the same company. Then if directors want more the workers will also get a bigger share of the wealth.
All this will be resisted by our rich elite seeing their privileges as economic wisdom. Yet low wages and pensions condemn millions of innocent and hardworking people to poverty, retirement insecurity and even early death. This is unacceptable in any society that considers itself as just and fair.
Austin Mitchell is MP for Great Grimsby and Prem Sikka is professor of accounting at Essex University. They are co-authors of Pensions Crisis: A Failure of Public Policymaking, Basildon, (Association for Accountancy & Business Affairs, price £8.95) www.aabaglobal.org