OCCUPATIONAL PENSIONS - NOW WE KNOW EXACTLY WHERE THEY'RE COMING FROM.
What We Are Told.........
We are all living longer. We are not saving enough for our later years of life. We will all have to work until 70 years or longer. Companies can no longer afford to support final salary pension plans - over 50% of them have been closed to new members since 2000. Employees will have to do with defined contribution plans. (We are not told that this means that all risks will be passed from companies to the employees). We are moving from a manufacturing economy to a service- led information economy. Knowledge is now the new capital. Knowledge is created by and resides in people. People are our most important asset......... What a load of insincere rubbish!What We Are Not Told......
"A recent study showed that at a time of worrying pension fund deficits, the 100 biggest UK companies paid out £39 billion in dividends to shareholders (investment institutions mainly) in 2004 - almost four times more than the £10.5 billion they paid into their final salary pension schemes. In that period, nearly half of the FTSE 100 companies declared shareholder dividends worth £39 billion more than the £37 billion pension funding shortfall they collectively face"
A moment's reflection will allow the import of this to sink in.
Companies deliberately choose to pay dividends to investors before they care to secure the financial futures and well-being of employees, their most valuable asset.
Companies also took pension contribution 'holidays' in the stock market boom times, to the tune of £20 billion - one way of looking at this is that companies 'owe' their pension fund members £20 billion. (See 'A Short History of UK Pensions and Savings - Fact and Spin')
Even some investment industry professionals find this difficult to stomach..... This is an anonymous quote from an experienced fund manager: "Although pension funds will themselves suffer if they lose a year's dividend income (I doubt it would amount to that) I feel guilty as a professional that my industry has let down the man in the street. Most are not investment savvy (See 'Whatever became of the envy of the world'.) and had a right to assume that the institutions would deliver. I also feel that the managers of equities are to blame for slavishly following the cult of the equity (they can only go up in the long run) and ignoring the mis-pricing that occurs after a 10 to 20 year bull run.
It should be led by government. They should restrict dividend payments for the next 3 or 4 years as a ratio of pension deficit (which should be made public). Thus dividends should be matched equally by pension fund deficit repayments up to one-third of the deficit. Any surplus could still be paid as dividend. In that way the current deficit would be re-paid over 3-4 years. Investors would be aware of the contingent liability on the company going forward"
Some might argue that retaining dividends to fund pensions is simply robbing Peter to pay Paul, as dividend flows will form part of the income for occupational pension schemes. We would respond that it is far better to retain dividend payments, which after all represent part of the value created by employees, before they reach the financial markets and are exposed to the risks of poor investment performance, value destructive speculation and the high costs inherent in those markets.
The Villains?
- Top managers in many companies who, motivated to please institutional investors, have taken the earliest opportunity to close their final salary pension schemes. These same managers have in the main made very sure that their inflated pension benefits have been fully maintained.
- Government, which has remained completely supine, and not intervened as millions have seen their retirement benefits eroded. Currently they are waiting for the result of Adair Turner's investigations. So far, we have heard no mention of dividend payments as robbing employees of the wealth that they have helped to create. We wait with bated breath.
The Heroes?
Those companies that have maintained their final salary pension schemes, often in the face of investor pressure to close them.
