|he impending pension crisis has long
been portrayed in the conventional press as an economic
problem. This has now been given further credence
in the report prepared by Lord Turner, former chief
of the Confederation of British Industry (CBI). The
familiar solution is compulsory to make people
work until they drop, and somehow force people
to save more even though income inequalities are
increasing. However, the report fails to acknowledge
that the pension crisis is above all a failure
of political policies. These policies have resulted
in increased inequalities in income and wealth
distribution, regressive taxation, wealth transfers
from employees to companies, abuses in the financial
sector, the investment of pension savings in the
stock markets and the absence of a political will
to do anything.
It is too convenient to blame the pension crisis
on the demographic changes and the fact that people
are living longer. The same also applies to company
executives, judges, MPs, ministers, financial speculators,
bank managers, pension fund managers and a number
of others, but there is no pension crisis for them.
Since 1997, the top 1% of earners doubled their
wealth to £797bn and control 23% of the UK
wealth. Over a longer period, the poorest 50% saw
their share of the nation's wealth shrink from
10% in 1986 to 5% in 2002.
The wealthiest 20% of the population earns 17
times as much as the poorest 20%. With tax relief,
the government enables them to build a retirement
pot of £1.6 million, something most workers
will not earn during their entire working life.
Some 60% of the pension contributions tax relief
goes to only 9% of the population. Nearly 8 out
of 10 FTSE company directors are able to retire
at 60 and enjoy a pension payout on average 26
times higher than the average worker. Compare this
to the plight of the ordinary worker.
The state pension in Britain, around 30% of the
average earnings, is the lowest in western Europe.
Even with company pensions, some 17% of pensioners
receive less than £5,000 a year, while 27%
receive between £5,000 and £10,000.
Yet the future will be even worse as many companies
are closing final salary pension schemes. Only
one in four private sector employees are now members
of good employer pension schemes, and the trend
is downwards. Yet the poor are being blamed for
the pension crisis and for daring to retire at
65. Successive governments have done little to
reverse income inequalities and create a climate
for ordinary people to save for pensions. Turner
does not ask government to redistribute the pension
tax relief away from the rich to the poor.
Ordinary people would love to save for old-age
pensions but most barely earn enough to afford
a house, transport and energy costs or educate
their children. This hardly leaves enough to save
for a pension. The UK government statistics published
in November 2005 show that the median gross annual
earnings for full-time male workers is £25,100
and £19,400 for full-time female workers.
These figures also mask regional inequalities.
For example, the gross weekly earnings in the north
east are £386, while in London the weekly
wage is £556. The UK government statistics
show that the annual income for the bottom 20%
of the population, the people most likely to be
condemned to abject old-age pension poverty, is £11,000
after tax and benefits.
With the prevailing income distribution, ordinary
Britons are struggling to survive. The number of
first-time house buyers is at a 25 year low. Where
people can afford to buy a house, 20% - 40% of
their income is taken up by mortgage repayments,
leaving precious little to put away for pensions.
Young workers, those on minimum wage and 327,000
people earning less than the minimum wage can only
dream of building a pension pot.
Pension contributions by employers are part of
a legal and moral contract, but successive governments
have enabled companies to transfer huge amounts
of wealth from employee pension schemes to shareholders.
During the 1980s and 1990s stock market boom, many
companies took pension holidays i.e. they did not
pay the agreed amounts into the pension schemes.
The Trade Union Congress (TUC) estimates that
companies withheld some £19 billion of contributions
to boost their profits and dividends. No company
has ever been prosecuted or fined for such policies
even though they have brought misery to many.
The regressive taxation policies of successive
governments have further eroded the ability of
people to save for pensions. Around £100
billion of taxes that could provide generous pensions
for all are evaded or avoided by multinational
corporations and rich individuals. Rather than
tackling the abuses, governments have shifted taxes
on to labour, small and less mobile businesses.
Despite record economic growth and increase in
corporate profits, the 1990-91 corporate tax take
of £21.5 billion increased to £33.5
billion in 2004-05. For the same period, the income
tax take increased from £48.8 billion to £122.8
billion. Individuals on the minimum wage end up
paying 10% of their income in tax and national
insurance contributions, whilst 65,000 wealthy
elites living in Britain but pretending to be domiciled
elsewhere pay little or no income tax.
After taking account of indirect taxes (e.g. VAT)
the top fifth of earners pay a smaller proportion
of their income in tax than the bottom fifth. Yet
the government makes no connection between its
tax policies and the pensions issues.
Many people have their savings in commercially
marketed pension schemes, endowment mortgages,
insurance policies or specialist bonds. Such savings
are not safe and do not guarantee an adequate return
though the managers of such schemes have done very
nicely. Nearly five million people have lost some £13
billion in the pensions mis-selling scandal. Over
six million people have been short changed to the
tune of £50 billion in the endowment mortgage
scandal. The precipice bonds, split-capital investments,
Equitable Life and other episodes further show
the failures of the 'light touch' regulation and
governments to safeguard people's savings. Company
executives devising and marketing the scams made
millions in salaries, bonuses, perks and profits.
None have been prosecuted. None of the offending
companies have been wound up to compensate their
Instead of real assets, people's pension savings
are invested in the biggest casino of all times,
the stock market. The value of the pension pot
is shaped by speculative frenzies and market bubbles
rather than investment in real assets. Bankers,
financiers and stockbrokers always win because
they receive commission whether the securities
are bought or sold. The pension fund managers receive
lucrative financial rewards for short-term gains,
but escape accountability when their gambles don't
pay-off. Such a structure cannot provide a long-term
stable pension policy.
The pension crisis is a failure of political policies
pursued by successive governments. Yet the Turner
and other reports portray it as an economic problem
caused by demographic changes. Somehow the same
factors do not appear to apply to the rich. Lord
Turner advocates compulsory savings by employees
to provide for pensions, but many people are simply
not in a position to save. For years to come, many
debt-ridden graduates will be busy repaying their
loans and thinking about finding adequate housing
and raising families rather than saving for their
Any government addressing the pension crisis needs
to reverse the rising income inequalities and end
the organised looting of people's savings by the
finance industry. This could be done by linking
executive salaries to the workers' salaries. For
example, no company executive should be able to
earn more than 10 times the average salary in the
This means that any executive seeking to receive
more will also need to pay workers more, especially
as they have helped to generate the wealth and
profits. Companies should not be allowed to take
pension contributions holidays. In the case of
pension scheme deficits, companies should be required
to pay 5% of their profits to correct the deficits.
Companies frequently say that workers are their
biggest asset, so it’s time their policies
The government also needs to end the regressive
system of taxation that prevents people from making
adequate provision for their pensions. It needs
to clampdown on tax avoiders to ensure that the
democratically agreed taxes are collected and redistributed.
To check the stock market bubbles, the government
should levy a tax on the speculative flows to fund
pensions. It also needs to look at the financing
of hospitals, schools, roads and homes. Instead
of paying exorbitant sums through the expensive
Public Finance Initiative (PFI) and the Public
Private Partnership (PPP) initiatives, public assets
should be financed directly from employee pension
funds. Such a way of financing public assets, provides
cheaper money and also increases the pension pots.
It is possible to end the pension crisis and give
people a reasonable pension by reducing income
inequalities, corporate excesses and finance industry
abuses but governments lack the political will
Prem Sikka is Professor of Accounting,
University of Essex and Director, Association for
Accountancy & Business