It seems that current conditions, i.e. poor stock market returns and company profits/survival under threat are hastening the long anticipated end of final salary schemes in the private sector.

I think this raises two issues: firstly, how should workers adapt and, secondly, why should the public sector be different?

 

To tackle the first, the answer is pretty simple. Workers will have to take on the burden of pension provision themselves. This is a pretty expensive business as a final salary scheme probably costs something like 255 of payroll and very few people are willing or able to commit that much to their long term wealth creation. Of course, misinformation in the media does not help; the BBC this morning said that the closure of final salary schemes would mean people being dependent on stock market investments. They could be, but not necessarily.

 

Final Salary Pension Schemes do not exist in a vacuum, they invest in exactly the same markets as any other investor, individual or not. The only difference with a final salary scheme is that it (or, more accurately, the employer) takes on the risk of success. If it fails to achieve the required rate of return, it simply asks the company to top it up, precisely why they have proved unpopular with company owners.

 

Because of this, FS schemes invest very conservatively and, because it assumes lower rates of return, this is very expensive. You can save yourself a lot of money if you assume that you will receive a high rate of return on your money but the risk of falling short is much higher.

 

So, as these schemes close, not much changes, it is just that individuals rather than shareholders become responsible and must allocate enough money to ensure a reasonable chance of success.

 

The issue of secure final salary schemes for state employees may become interesting, given the economic climate. Civil Servants and local government employees have fought very successfully to retain their FS schemes, arguing that the benefit helps to make up for their lower pay.

 

It seems likely that the Bank of England Monetary Policy Committee will announce today a further cut in interest rates from the current official level of 2%. This would be a mistake.

 

Banks are unlikely to pass on to borrows the recent cuts in full so any further cuts are pointless and serve to undermine the authority of the Bank. By the time the banking system is sorted out and the low rates filter through to most borrowers, the current crisis will probably be largely over and the need for such low rates will be fading. Meanwhile, savers seem to bearing the brunt of the rate reductions.

 

Banks are simply taking the cuts as an opportunity to rebuild their profitability, in itself not a bad thing, rather than ease lending, the real problem. Somehow, the Bank of England needs to encourage banks to lend to each other (and thence to borrowers) at lower rates and in higher volumes. This will then allow rates cuts to be passed on to borrowers by increasing competition.

It seems likely that the Bank of England Monetary Policy Committee will announce today a further cut in interest rates from the current official level of 2%. This would be a mistake.

 

Banks are unlikely to pass on to borrows the recent cuts in full so any further cuts are pointless and serve to undermine the authority of the Bank. By the time the banking system is sorted out and the low rates filter through to most borrowers, the current crisis will probably be largely over and the need for such low rates will be fading. Meanwhile, savers seem to bearing the brunt of the rate reductions.

 

Banks are simply taking the cuts as an opportunity to rebuild their profitability, in itself not a bad thing, rather than ease lending, the real problem. Somehow, the Bank of England needs to encourage banks to lend to each other (and thence to borrowers) at lower rates and in higher volumes. This will then allow rates cuts to be passed on to borrowers by increasing competition.