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Pensions anger as even profitable firms cut benefits

The Observer, Sunday 22 January 2012

When even successful companies such as Shell and Unilever are taking an axe to staff retirement packages, is the outlook bleak for everyone?

Unilever, the maker of everything from Pot Noodles to Dove soap, has infuriated its staff by cutting pension payouts – despite being highly profitable. Shell, another household name, has followed suit with plans to cut retirement incomes.

Unilever suffered a wave of strikes which started last week and will continue for the next five days. Much of the anger among employees at its factories and research units is focused on the company’s £6bn operating profit and the pay, bonus and pension top-ups awarded to chief executive Paul Polman. He pocketed £2.8m last year, of which £1.7m was a performance-related bonus. His pension was increased by a company donation of £352,000, according to the 2011 annual report.

For staff, it is a typical them-and-us story of sky-high rewards for directors while shopfloor workers are bullied into accepting reduced standards of living. The changes to pension scheme rules are the flashpoint. However, a closer look at the changes makes it harder to characterise as a poor deal.

In 2008, Unilever made its first move to save costs, but refused to push new staff into the default arrangements adoped by other companies, which rely on stock market investments and put all the risk of generating a retirement income on to the employee. The board said new joiners would receive a pension based on their career-average earnings. It thus maintained the scheme, and effectively guaranteed a maximum cut of only 20% to pension payouts, while rivals were devising schemes for new staff that would mean losses of 60% at least.

Last year Unilever told staff that the costs of providing a pension had soared following a rise in life expectancy, poor investment returns and the threat from more costly regulations. It meant all staff, not just new joiners, needed to move to the new career-average scheme.

Unions are well aware of the rising costs of pension provision. Average life expectancy is 80, up from 72 in the 1970s, according to professor David Leon of the London School of Hygiene and Tropical Medicine’s epidemiology unit. He says it is likely to carry on rising as more people stop smoking and eat healthily, though increasing obesity and diabetes could reverse the effect. According to the Office for National Statistics, between 2004-06 and 2008-10 average life expectancy for women rose by a year to 82.3, while for men it rose by 1.2 years to 78.2.

Poor investment returns are the other side of the equation, after a decade of low interest rates and underperforming stock markets. The index of Britain’s top 100 companies declined 5.5% last year. In fact, growth in most schemes over the past 10 years has been simply a result of employee and employer contributions. Investment gains, such as they are, have struggled to keep pace with inflation.

Firms also face extra regulatory costs because of European Union plans to categorise occupational pension schemes as insurance vehicles. This will mean they must boost their funding position, something they can only do at their own expense.

Unions also know that the biggest losers from the shift away from final-salary benefits are middle managers on higher pay. Those at the top have risen through the ranks to a much higher salary than the one they started on. A career-average scheme takes into account income levels during the early years of a career and can drag down the total.

Then there is the question of Polman’s pension contribution from the company, which amounts to a third of his £1m base salary. It seems a high figure until pension analysts point out that most employees over 50 in a final-salary scheme will enjoy a pension contribution of at least a third of their salary.

One of the main unions in the Unilever battle, Usdaw, supports Tesco’s career-average scheme. And the deal it signed meant all staff foregoing their existing final-salary benefits. Unilever will protect all previous commitments.

Shell, on the other hand, is representative of most FTSE 100 firms. It plans to direct new employees into a stock market-related scheme while retaining a final-salary option for existing employees. This is the traditional solution of finance directors, who have disliked the unlimited liability and rising costs of final-salary pension schemes since the mid-1990s.

The banks were the first to ditch their final-salary commitments. In the stock market crash of 2003, almost all the 7,000 remaining firms with final-salary schemes shut them, though, like Shell, only to new members. This created a two-tier workforce inside many companies, something which unions felt obliged to ignore.

Some workplaces took a stand against the shift to retaining final-salary benefits for existing workers and stock-market plans for new staff but, outside the public sector, these campaigns fizzled out.

The UK now has an ageing group of about 2 million employees working towards retirement with their final-salary benefits intact. Another 16-18 million have some of their working life covered by a final-salary scheme.

But the bulk of contributions for 20 million workers with a pension are in the new stock-market schemes that account for 88% of all current contributions, according to pension advisers Towers Watson.

Final-salary schemes usually guarantee to provide a retirement income after 40 years’ service worth two-thirds of a worker’s final pay cheque. With a stock market-invested pension it is a very different picture. For many people it has meant getting back little more than was put in, despite the stock market having more than doubled its value in 20 years. The result is a pension worth no more than a fifth of final salary.

Fund managers, who are often blamed for siphoning off much of the investment gain in pension schemes to pay their commissions and fees, are unlikely to make much progress in the next few years of recession and lacklustre growth across the developed world. This will only lead to smaller payouts from the new breed of cheaper scheme. In this environment, strikes against businesses such as Unilever that continue to offer generous guarantees could become harder to justify.


RELATED:  5 Jan 2012: Union attacks Shell as it closes final-salary pension scheme in Britain

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