Pensions have gone from BMW to old banger – and there’s no way back

Britain’s company pensions, once the envy of the world, are now mediocre, and attempts to find a happy medium will fail.

Imagine you are talking to your boss about your benefits package for the following year. You’ve agreed on a pay rise and now you turn to the fringe benefits.

“Bad news,” he says. “We’ve reviewed our policy on company cars and can no longer afford the BMW you’ve had since you joined. Your new company vehicle is a 25-year-old Reliant Robin.”

Far fetched? This is exactly what millions of workers have been told over the past decade or so if you just substitute “pension” for “company car”.

For when it comes to company pensions there is no middle ground. The old ones – the BMWs – had everything. They included a link to final salary, offering the chance that, once the state pension and reduced outgoings were taken into account, your standard of living would be much the same when you retired. They offered index linking against the ravages of inflation and a pension for your spouse, while there was no danger of your income being at the mercy of financial markets.

The replacement for these gold-plated pensions is as different as it’s possible to be.

They don’t offer a known income in retirement and there’s no link to final salary; index-linking and a pension for a surviving spouse come only at the cost of a worse income for yourself; and movements in the markets could have a huge effect on your income.

The Government realises that some kind of halfway house between “defined benefit” pensions (the BMW) and “defined contribution” schemes (the old banger) would be desirable. It has come up with “defined ambition”, a rather vague concept that, it is hoped, will give workers a little more certainty about the income they can expect in retirement.

Old-banger pensions involve two distinct areas of uncertainty: you don’t know how much money you will have saved by the time you retire, and you don’t know how much income each pound you have saved will buy. A “defined ambition” pension could, for example, remove one of these uncertainties by guaranteeing a minimum value of your pension pot at retirement age.

But pension experts tell me that this middle way will never get off the ground. The moment you have a framework that forces employers to share some of the risk with the pension scheme members, it’ll be the thin end of the wedge, companies fear – the Government won’t resist the temptation to gold-plate the requirements, a little at a time, until this hybrid vehicle is as good as the BMW.

Why are the experts so sure this will happen? Why, it’s exactly what happened last time with final salary pensions: ministers added so many bells and whistles that they became superb pensions – but unaffordable.

With the old banger, companies feel safe – the schemes are simple and stable; they make no promises. Change that formula ever so slightly and there’s no knowing where it will end, employers say.

Well intentioned ministers destroyed a British institution that was the envy of the world, and employers will not be hoodwinked into bringing it back.

So you won’t be getting your BMW back – it’s the old banger pension or nothing.

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