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Pension misery for millions

Adair Turner’s report on the pensions crisis fails to address the question of redistribution, says Prem Sikka

The 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 victims.

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 pensions.

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 same company.

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 demonstrated this.

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 to act.

Prem Sikka is Professor of Accounting, University of Essex and Director, Association for Accountancy & Business Affairs