Pensions and benefits

Workplace pensions – the old-fashioned kind that set income in retirement as a percentage of the last year of salary earned – sat at the core of industrial modernisation after the second world war.

In the US and the UK especially, officials set wage and price controls to contain the threat of destabilising inflationary spirals amid postwar reconstruction. But those controls coincided with a manpower shortage – pension benefits could be used to attract and retain workers. Both countries experienced a surge in birth rates. With growing numbers of workers contributing to retirement savings and few pensioners collecting benefits, along with double-digit returns on investments, pension promises were a low-cost incentive. In addition, high marginal corporate and personal tax rates made pension contributions cost-effective.

So well funded were the UK’s pension schemes that retirement funds became the primary tool for financing corporate restructuring.

Data from the UK’s Office for National Statistics suggest workplace pension participation peaked in 1987 when there were 10.6m members of defined-benefit pension schemes.

By then, however, jobs for life were becoming outdated. Laws were changed, so employers had to provide some inflation-proofing on benefits. Total active membership fell slightly to 10.3m up to 1995.

By 2001 new accounting rules that forced companies to make the cost of pension promises clearer coincided with the bursting of the dotcom bubble in share prices and the subsequent collapse in interest rates. Corporate pension schemes became cash drains.

Moreover, rising longevity raised the cost of pension promises that had been made years earlier. In 2003, the average US male worker could expect to spend 18.1 years in retirement, against 11.5 years in 1950. In the UK, it is estimated life expectancy for a male at age 65 will rise from 13.7 years in 1996 to 19.5 years in 2056 and for a female from 17.4 years to 23.4 years.

In the UK’s private sector, there are now fewer than 2m active scheme members and about 80 per cent of schemes are closed to new members.

The days of defined-benefit provision have largely come to an end. While much of the blame is placed on a combination of government regulation, accounting rules and the vagaries of markets, there are good reasons to question whether they remain suited to the workplace of the 21st century.

Norma Cohen