It was reported on June 4 that Barclays Bank (the bank that uses structured finance and offshore havens to increase its and its clients' profits by avoiding huge amounts of tax), has closed its final salary pension scheme to existing employees. BP has closed a similar pension scheme to new employees. There's nothing new about this: in fact, Barclays and BP are amongst the last UK blue chips to make this move.
The final salary pension scheme contracts to pay retired employees a defined proportion of their final salary for the rest of their lives. The contributions – the saving – into the scheme is therefore variable and depends on the expected returns from the invested funds, the employee's expected lifespan after retiring, and his or her expected final salary. With falling and increasingly volatile returns, rising life expectancy, and salary increases greater than return rates, certainly in managerial levels, the costs and the uncertainties of providing this kind of retirement plan have sky-rocketed.Ignoring inflation, tax, and costs, a back-of-the-spreadsheet calculation shows that on a fixed salary 40 years of contributions at 15% when real returns are 2% p.a. would, if one is expected to live 15 years after retiring, provide a fund that would pay 61% of one's salary. Given the much-used target of 2/3rds of final salary, that isn't bad. But even modest wage increases through promotion and experience bring this number down fast. With an annual raise of just 3%, the figure falls to 34% of final salary – requiring a doubling of lifetime contributions to get back to the same proportionate pension. Since these pension obligations are contractual, it is easy to see how a fund deficit can quickly arise. If it isn't topped up quickly the sudden readjustment can threaten the employer's solvency.
According to the BBC, a spokesman from BP said they wanted to stop the volatile costs of funding the scheme having a detrimental impact on the company's annual profit and loss accounts. "The main reason is managing future costs and risks - which are much more difficult to predict," he said. "The risks are becoming much more visible and we want more certainty."
So BP, Barclays, and most private companies in the UK now only offer defined contribution pension schemes, where the cost to the company is a certain proportion of the employee's salary, and all the risks are transferred to the individual. Only in the state sector is the final salary scheme still the norm – probably for two main reasons. First, state salaries are on average far lower than in the private sector and a respectable pension is one of the rewards of that restraint. Secondly, the cost of state sector pensions is at the risk of future taxpayers and therefore at least for now politically relatively insensitive.
At the core of this story, though, is the assumption that maximising the predictability and level of profits – returns to shareholders – is the primary responsibility of corporate management, to which the interests of other parties, be they employees, suppliers, the general public, the environment, must be subordinated. Though sanctified by legal codes, it is only an assumption. It is not a necessary condition of life.
In the case of pensions, the unfortunately polarised response is that all the risk, not to mention worry and hassle, previously sitting with management and shareholders should be transferred to employees. This cannot be right and it would be easy to design any number of compromise solutions that share risk and address the two elements that all the parties can do something about: savings levels and pension expectations.
Put another way, the story highlights the end of solidarity and social cohesion as motivating forces in the workplace. Whatever the corporate mission statement and however lavish the Christmas party, the message is that employees are on their own.