Operation Successful… but patient dies

In a ‘well who’d ever have thought it…’ kind of moment, the Confederation of British Industry (CBI) has announced that according to its research, final salary schemes are the cause of more misery for companies than…well…money purchase schemes.

For those of you who find the whole thought of pensions far too depressing and confusing (and let’s face it, that’s most of the population including several pension lawyers of my acquaintance!!) let me try and give a short guide to the difference.

A final salary scheme (sometimes called ‘defined benefit’) promises benefits based on a percentage (typically 1/60th) of final salary times the number of years of membership of a scheme. The amount of contributions paid in bear no direct relation to the pension that comes out the other end. If the pensions promised are higher than the monies in the scheme, the scheme is in deficit and the employer has to make up the shortfall.

A money purchase scheme (sometimes called ‘defined contribution’) is a WYSIWYG type of arrangement. What you see is what you get! The contributions going in are invested and what you get out in pension is the sum of those contributions plus any investment return over the years. Nothing more.

The open ended promise of a traditional DB scheme was great when times were good, the economy strong, business thriving. Indeed, things were so good that if there was too much ‘fat’ in a scheme, the tax man required schemes to reduce the surplus. Companies took ‘contribution holidays’ as there was no other legal way of getting their money back generally.

But then the economy took a nosedive, deficits grew alarmingly, the stock markets (in which a significant amount of pension scheme money was invested) tumbled and the regulatory regime got tougher. Companies found themselves in a no win situation. On the one hand, business income was falling, on the other, they were being required by law to pump more and more into the pension scheme. You can only bleed the patient so much before he turns up his toes and dies.

Unfortunately, it takes Governments a long time to realise that the Goose has ceased laying Golden eggs. On Wednesday, let’s hope the Chancellor doesn’t finally provide the coup de grace…but I suspect, he will not be able to resist just one more thrust of the tax knife into the DB scheme.