ECONOMICS

THE FUTURE FOR PENSIONS

Introduced by John Jolliffe, Consultant Actuary, on 10 April 1997

John Jolliffe has given actuarial advice for the occupational pension schemes of a number of well-
known U.K. companies and local authorities. He has been the U.K. member of a panel appointed by the
European Commission to enquire into European occupational pension matters.
Pensions have been a matter of much public debate in recent times, following the Maxwell scandal
and the mis-selling of commercial pensions to those in occupational schemes. A new Pensions Act came
into force at the beginning of April intended to prevent a recurrence of such mistakes' and each of the main
political parties had a section on pensions in their election manifesto.
The much higher proportion of the population in the UK having funded pensions compared with
other European countries is an important factor as we consider joining the European Monetary System as it
could mean, if we are not closely involved in the negotiations about the formation of EMS, that the UK
contribute excessively to pay for other country's adjustment of their schemes to a funded basis.
Occupational pensions in the UK are funded by direct investment by the company in the Stock
Market, through Insurance companies or by Pay-As-You-Go (PAYG) for the civil service, NHS, police, etc.
In Europe, almost all are PAYG, like the UK State Pension.
PAYG schemes involve the present working population paying for the present pensioners' income.
As the number of pensioners is increasing faster than the working population, due to increased longevity
and a low birth rate, the burden is rising. High unemployment and early retirement make matters worse. In
the EU as a whole in 2025 the number retired will equal 43% of the working population.
The Money Purchase form, in which each employee is allocated a percentage of his/her wages to
be invested for him/her is becoming popular to replace the Percentage of Final Salary system general until
recently. It is not a good arrangement, especially if the investment is made in a Government-controlled fund,
which is likely to be very conservatively run for safety rather than high return, since the final pension
depends on the time of retirement and the financial market conditions then affect the cost of buying an
annuity with the money.
Three changes are desirable: occupational pensions should be compulsory for all employees (only
50% of schemes are compulsory now); pension should be transferable when the employee changes jobs;
and the retiring age should be the same for men and women.
Points arising in the discussion included the difficulty in finding independent advice one could
trust and the power of investment managers of pension funds in the Stock Market, since 500- 600 billion
are invested by them. It was noted that expectation of life was increasing by one month each year. A leaflet
reporting a seminar on the future of pensions was distributed and is available from Rodney Tye, the
Convener.

Don Lovell