Britain - "Pension reform" - a life-buoy for capital, paid for by the working class

Jan/Feb 2006

After three years of apparently painstaking efforts, the report of the "Pension Commission", chaired by former CBI director-general Adair Turner, finally came out in the first week of December 2005. Once again, what has been branded for years as the "looming pension crisis" was all over the newspapers' front pages. Finance experts and business bodies scrutinised feverishly the fine print of the 1000-page report, in search of what could be in it for them and their clientele. But this left working class people, the only ones for whom a pension is a really vital issue, because it can make all the difference between a decent living and destitution, none the wiser.

Indeed, for most workers, Turner's proposals and the frantic polemics they raised, probably made just as little sense as the bewildering jungle of existing pension provisions. They were told that under the provisions advocated by Turner, they would be better off. But at the same time, the only concrete measures that seemed to emerge more or less explicitly out of all this noise were yet more attacks on their pension rights. To cut a long story short, the working class was told, once again, that the only way to resolve the "pension crisis", was for it to tighten its belt. In return for a slightly higher pension for some, workers were supposed to agree to a later retirement age for all and a likely real wage cut for many!

Only a few weeks later, a far more significant event drove home Turner's conclusions. This was an announcement by Rentokil-Initial, the multinational which has built an empire on the exploitation of casualised labour, with "90,000 employees providing a range of support services in over 40 countries", as it boasts proudly. This company announced that it was planning to close down its final salary occupational scheme, not just to new entrants - which it had already done in 2002 - but to all active members as well. Having taken a pension contribution holiday until 2004, under the pretext that its scheme had a "surplus", Rentokil's management had the nerve to claim that it could not "afford" what it now called the scheme's £286m "deficit". This being the first among the FTSE 100 - the 100 largest giants listed on the London stock market - to make such a move, commentators were quick to predict that others would soon be following suit, thereby threatening the pensions of hundreds of thousands, if not millions, of private sector workers.

This development came as a reminder of how much the very limited safety net of occupational pensions has been shrinking over the past years. While already covering only a minority of active workers, it is now leaving more and more of them dependent on an increasingly deficient state system, while a growing number of companies are cutting their contributions to pension provisions in order to boost their profits.

By the same token, the Rentokil announcement, coming as it did from one of the City's heavyweights, underlined the hypocrisy of all those politicians and so-called experts, who shed tears over the "burden" of companies supposedly paralysed, if not doomed to bankruptcy, by the sheer size of their pension fund "deficits".

Indeed, this paralysis did not stop champagne from flowing in the City, in the last days of 2005, to celebrate the rise of share prices over the year - an unprecedented 22%, with Rentokil achieving a hefty 15%! If anything, this showed that if there is a "crisis", it is certainly not the capitalist class which foots the bill!

Not a "crisis", but an offensive against workers' wages

Among the polemics sparked off by the Turner report, there was an alleged "clash" between the Blair and Brown fan-clubs. This had, undoubtedly, more to do with trying to assert some "differences" between the two sides, than with pensions as such. Nevertheless, Brown was said to consider Turner's proposals as "unaffordable", because of their slight upgrading of state provisions, and to resent their attacks against his pet, Pension Credit. By contrast, Blair was said to rather like these proposals, which gave a new lease of life to his own failed pet, stakeholder pensions.

Significantly, however, neither of the two cliques found anything to say about Rentokil's announcement. Nor did they object to some even more scandalous ones that followed, at the beginning of January. For instance, when retail billionaire Philip Green, who had just cashed in £1.2bn from the sales of most of his shares in the Arcadia fashion group, told the group's employees that they would have to increase their pensions contributions by 50% and retire 5 years later.

But then, there is no difference in this respect between Brown and Blair. Nor even between Labour and the Tories, for that matter. As far as the politicians of the capitalist class are concerned, the role of the pension system has always been there merely to get the working class to pay, out of its own wages, for a minimal cushion on which to survive after retirement, at a minimum cost for capital (in fact, finance capital even manages to make hefty profits out of the British pension system!). But they never intended the pension system to get the bosses to cater, out of their profits, for the needs of their retired workers. And since the capitalist chorus, from the CBI to the Institute of Directors, is now saying that the cost of pensions for capital is too high, the politicians' chorus echoes back, "so be it" and advocates some form of more or less overt cuts.

Of course, since such cuts are unpopular, governments had to find a pretext. Thus came what they called the "pension crisis", caused by rising life expectancy, which, allegedly, would soon turn Britain into a "grey" society. However, official statistics predict that the proportion of pensioners will increase from today's 19% of the population to only 25% by 2050, on the basis of present retirement conditions - which is not all that "grey". But even then, these statistics take no account of the inflow of immigrants which, as official figures prove, is necessary to maintain the current level of the population - and is fortunately taking place, despite Labour's anti-immigrant rhetoric.

Even more importantly, the gloom-and-doom merchants take no account of rising productivity. Has Brown forgotten his own boast, that Labour's "successful economy" has one of the fastest productivity growth rates among the industrialised countries? Whether this is true or not, productivity does increase and, with it, the wealth produced by the active population, even if it tends to become relatively smaller. This is why many big manufacturing companies get much reduced workforces to maintain the same, or even higher levels of production than one or two decades ago. This may be partly due to a higher work intensity for the remaining workers. But it is also due to a rise in technological productivity which, even the competitive chaos of an irrational economic organisation such as capitalism, is able to generate.

So, yes, even on the basis of its present organisation, society can "afford" to cater for a larger proportion of retired members in the coming decades. Yes, it will be able to allow workers, who have been slaving away all their lives to fill the coffers of the capitalist class, to take some rest, before they are too old to enjoy it, with the decent resources that this requires. And yes, the value created by the active working class will remain more than enough to make this possible. If there is an obstacle to this - and it is the only one - it is the parasitism of the capitalist class, which wants an ever larger share of this value for itself.

This parasitism has been increasing over the past decades, since the 1970s. And since Labour came into office, it has soared even faster, to unprecedented levels. There are ways of measuring this parasitism. For instance, since 1997, companies' disposable income has increased by 10%, in real terms, and their cash reserves by 57%. Yet, over the same period, they cut their investment by 21%, meaning that they have used their profits either to line the pockets of shareholders or to embark on financial ventures, but not to develop production and facilities.

Instead of investing, the capitalist class has been busy squeezing more and more value out of the working class. This involves cuts in conditions and cuts in real wages - which include both employer and employee pension contributions, whether to the National Insurance Fund or to occupational schemes.

Cutting their wage bills is the bosses' watchword. Since pension provisions are part of these bills, directly or indirectly through the state system, the capitalist class wants them cut. As faithful trustees of capital's interests, politicians of all sides are willing to comply. They may differ on the method, but not on the objective.

A long-standing agenda

It is no wonder, therefore, that the Turner report is only the latest of a very long series devoted, to put it crudely, to the best way to cut pension provisions without provoking excessively angry reactions from the ranks of the working class. This series started back in the Tory years, with the Goode report (1993). It went on under Labour, with the Myners report (2001), the Pickering report (2002) and the Jarvis report (2004), just to quote some of the main ones, not to mention the Green and White papers which preceded the many pieces of pension legislation passed over the past 20 years.

In all these reports and papers, there was a continuous thread showing the common agenda followed by the various governments, whether Tory or Labour. Firstly, pensioners' poverty is to be confronted by the state at the lowest possible cost, without any increase in taxation, either on company profits or on wealth. Secondly, pensioner poverty is due to workers' failure to "save" during their working lives. Thirdly, in order to reduce the cost of pensions to the state - and, therefore, free more of the state's resources for other things such as tax rebates and other subsidies to capital - active workers have to be made to "save". And, since the best "incentive" is the fear of old age destitution, this provides another reason for state provisions to remain at the meanest possible level.

In other words, following a pattern familiar to the jobless, single mothers, workers on incapacity benefit, etc.., destitute pensioners have only themselves to blame for their plight! Never mind whether they found themselves unemployed for long periods of time (many did), or on such low pay that they could only accumulate debt, but certainly not savings. Poverty is a crime in this society and the culprits should pay a price for it!

Not all the policies advocated by this long string of reports were implemented. Only some were. But the common agenda of these reports remained the gist of every government's pension policy. Predictably, the result has been an increase in pensioner poverty. Despite many past forms of means-tested assistance, including Brown's Pension Credit, 20% of pensioners still live below the official poverty line. And the number of those forced to go through the humiliation of subjecting their lives to scrutiny in order to qualify for the state's means-tested charity is not decreasing, but increasing. In fact, following current trends, it is estimated that 70% of all pensioners will have to go through this by 2050! And this, only to get a guaranteed minimum on which no-one can do more than survive - if that!

From this point of view, the Turner report seems to be departing, in some respects, from the traditional policy. Its stated objective, however, is not so much to alleviate pensioners' poverty than to cut administrative costs. The cheapest way of delivering state pension, it argues, is to make it universal (that is based on residency rather than years of contributions), individual (thereby making women independent from their husbands), flat-rate and non-means-tested.

Accordingly, says Turner, in the long term, the Basic State Pension should become a personal, universal pension, linked to the earnings index (instead of the retail price index) and set at a level close to the equivalent of the minimum guaranteed today by Pension Credit. The Second Pension should become progressively flat-rate, instead of being linked to the pensioner's past average earnings. Over time, this would reduce means-tested benefits to virtually nothing.

On the face of it, these proposals may appear as an improvement on the present system, at least for the poorest pensioners. Except that they actually involve no change for these pensioners in the short term. And, in the long term, they would only result in doing away with means-testing, without increasing the level of the poorest pensioners' income. Pensioner poverty would remain, while state charity would disappear, not because it is humiliating and should be unnecessary, but because it is costly!

In that sense, as well as in many others, as we shall see, the Turner report remains consistent with its predecessors.

Then comes the bill for workers

Of course, while not improving the lot of the poorest pensioners, Turner's proposals would come at a cost. Ultimately, all pensioners would receive the full amount of the Basic State Pension at a level equivalent to the minimum guaranteed by today's Pension Credit. This would include those who do not qualify for Pension Credit on today's terms (55% of all pensioners at present), as well as those who do qualify, but do not claim it (18% of all pensioners at present). In other words, this part of the Turner report would imply an increase in pension expenditure, over and above the increase resulting from the growing number of pensioners.

But if there was ever a piece of hypocritical and cynical reasoning, this is it. For one thing, Britain spends around 5% of national income on state pension provisions - which is less than half as much as most of the rich European countries!

In addition, the National Insurance Fund, which is entirely financed by workers' wages through NI contributions, has a significant surplus - over £35bn, or more than half of the sum total of the pensions paid by the Fund annually. This surplus has already been used by the Labour government to make up for "exceptional" items - but workers never saw a penny of these. For instance, in 2001, Blair, who was trying to look greener, introduced a "Climate Change Levy" on companies. But in order not to upset big business, it was quietly decided that this levy would have to be "revenue neutral" by cutting employers' NI contributions by 0.3%. In other words, workers pay for the bosses' green levy through the National Insurance Fund!

Then, of course, paying the same level of improved Basic Pension to better-off pensioners, as to the worst-off, would be far cheaper to the state (and public finances would be far better off) if the rate of income tax on high earnings had remained at the same level as it was in the 1970s. But neither Turner nor Labour would ever dream of taxing the rich. So, one way or another, it is the working class which is supposed to foot the bill.

In this respect, Turner did not go very far in reaching for his proposals. For years bosses' organisations and so-called experts have been arguing for postponing the retirement age. And this is also how Turner proposes to reduce the cost of pensions to the state, by phasing in an increase in retirement age to 68 or 69 by 2050.

The Turner report uses the spurious pretext that it is quite legitimate for retirement age to follow the same pattern as life expectancy. As if the only purpose of scientific and medical progress was to allow people to work longer!

Of course, if society was organised differently, so that workers could choose their working conditions according to their physical abilities and organise their working patterns so as to fit in enough time for leisure and other activities, instead of having to slave away just to scrape a living, it would be different. But in today's exploitative society, only a tiny wealthy minority enjoy such a privilege. And even among this minority, isn't it ironical, that people turn out not to be very keen on late retirement? Thus, a TUC survey of Britain's 50 largest companies showed that 98% of their top directors planned to retire at 60, rather than at 65 like their employees.

Besides, there is something shockingly hypocritical in such an argument, which Turner himself more or less acknowledges in passing, by recommending that "measures to ensure that lower socio-economic groups, with lower life expectancy, are not disproportionately disadvantaged" should be taken. Apart from the somewhat contemptuous language, what exactly does this mean? Is Turner saying that retirement age should not be postponed for manual workers in Glasgow, whose life expectancy is 69, or for unskilled manual workers in the South-East, whose life expectancy is 67? Does it mean that tens of thousands of line workers in the car industry, who are literally killing themselves at work due to mad shift patterns and crazy speedups, should be allowed to retire earlier? Turner certainly does not say that much. And yet, it is the case that, already, by being forced to retire at 65, many of these workers end up dying on the job!

But in the realm of hypocrisy Turner does not stop there. He also borrows from worthy predecessors. It should be recalled that, on retirement age, it was Thatcher who first started the ball rolling in the 1980s, with a diktat which phased in retirement age at 65 for women, instead of 60. At the time, this was done in the name of equality with men! Today, Turner is resorting to the same sort of hypocrisy, this time in the name of fighting "ageism"! However, it must be said that Turner is only following the example set by Blair's government, which already passed legislation, in 2004, to "encourage" workers to stay at work after retirement age and to allegedly pre-empt discrimination against them.

But how can discrimination against older workers be prevented by depriving them of their right to retire with a pension when they feel they need it? Such discrimination does exist. It is one of the reasons for the abnormal increase of the number of workers on incapacity benefit over the past period. But those responsible for this discrimination are employers who prefer to throw away their older permanent workers in order to replace them with cheaper, more productive, younger, casual workers. Is Turner, let alone Blair, prepared to declare such "business-motivated" redundancies illegal? Of course not! So, behind the hypocritical pretext of fighting "ageism", postponing retirement age is merely a recipe for creating a whole new layer of senior unemployed workers.

Behind the pension schemes' "deficits"

The second plank of the Turner report is not designed to address the question of pensions as such, but rather the growing dislike that employers have for pension schemes, which is now broadcast almost daily by the papers, in the form of astronomical figures concerning occupational pension fund deficits.

Traditionally, the system of occupational pensions allowed a large section of the working class to have a relatively more comfortable retirement, than if they retired on state provisions alone. This system was based on the accumulation of employee and employer contributions into a fund which was invested in shares and other valuables. The value of the fund was supposed to increase with time and, when retirement came, each worker got a pension paid by the fund's accumulated profits. This system had many flaws. Changing jobs usually meant losing part of one's pension, if not all of it. And there was always the risk of the fund losing value, due to bad investment or market conditions. But fund trustees were usually cautious, their investments were closely regulated and, by and large, for the workers of large companies, this system worked relatively well until the 1980s.

In 1985, financial markets were de-regulated. This resulted in a frantic increase of stock market speculation, with the potential for large and quick gains, but also large and quick losses. Share prices started going up and occupational pension fund managers, who were no longer constrained by the past regulations on their investment, took the gamble by focusing their investment on the stock exchange. These were the so-called "golden years", when it became normal for a fund to gain 20% in value over a single year.

Around that time, the Tory government changed the rules concerning employers' duties towards their employees' pension funds. It was decided that the funds' future liabilities would be calculated on the basis of current investment return, which amounted to making the assumption that the rise of share prices would go on forever at the same rate. Anything over and above these liabilities was to be considered as a surplus with which companies were free to do what they pleased. Of course, the bosses did not turn down such an invitation. Some employers raided their pension fund surplus in order to boost profits. Others, took what came to be known as a "contribution holiday" - meaning that they stopped paying their contributions to the fund.

This scandal went on until the end of the 1990s. Then came the so-called "dotcom" stock market crash and, all of a sudden, the already reduced surpluses of the pension funds started to melt away completely and threatened to turn into gaping deficits. This was compounded by large-scale redundancies which took place almost without interruption during that period, thereby reducing the flow of contributions into pension funds. As it was becoming more difficult and more dangerous to try to make quick profits on financial markets, the bosses found themselves faced with the threat of having to finance pensions out of their profits. And many of them began to seek ways of protecting themselves against this risk.

This led to a large wave of cuts in occupational pension provisions. In a large number of companies, new entrants were no longer allowed to join the existing final salary schemes, which guarantee pension levels on the basis of length of service and the level of wages before retirement. Instead, they were offered schemes which gave no guarantee on the level of pensions and involved much lower contributions from the employer. Not only did this cut the risks faced by employers but, by the same token, it also allowed them to cut the real wages of their new recruits.

As a result, according to the latest survey of the National Association of Pension Funds published at the end of 2005, 57% of all companies have closed their final salary schemes to new entrants or even to existing members by now, while another 25% expect to do so in the coming year.

While companies were taking these drastic measures, more and more experts were advertising the bosses' growing desire to free themselves altogether of any duty regarding pensions. However, this is easier said than done. If there is an issue on which workers are likely to resist, it is their occupational pension - which they consider, rightly, as their property. And this is where Blair's government came to the bosses' rescue by offering them a convenient accounting trick dressed up as a protection for workers.

This trick concerned the rules for calculating pension funds' liabilities. Instead of calculating them on the basis of current investment returns (around 10%), companies were required to calculate them more or less on the basis of current interest rates (just over 4%). Of course, this was justified by the need for "financial prudence" in the light of the disasters following the "dotcom" crash. But beyond this virtuous pretext, this trick allowed companies to show a big "deficit" even in a healthy fund. Of course this was not so good for shareholders, who did not like to see big black holes on balance sheets. But it did provide companies with an ideal justification for their drastic pension cuts in front of their workforce - although, in reality, even calculated in that way, these "deficits" were not always as large as they seemed to be. For instance, in the case of Rentokil, its pension fund's "deficit", which involves liabilities spread out over several decades, is more or less equivalent to its net profits over the 18 months ending in June 2005.

Everyone, from politicians to so-called economic experts, find it perfectly normal that workers should pay for these deficits through cuts in their pension provisions and even through losing part of the contributions they have already paid. But no-one questions the plundering of pension funds by the bosses, which has led to the present situation. If anyone should be made to pay for these "deficits", it is the companies and their shareholders which have robbed workers for so many years.

A way out for the bosses?

Of course, this is not what Turner and Blair have in mind. For both of them, any "pension reform" should offer the bosses a way of disengaging themselves from pension provisions altogether. By the same token it should offer the finance barons the opportunity of grabbing the entire savings of the working class in its claws.

These were already the objectives of the ill-fated stakeholder's pensions launched by Blair a few years ago. They did not work. Workers showed no interest in a scheme that reminded them too much of the personal pension schemes championed by the Tories in the previous decade - and of the huge losses suffered by 1.4m people who fell for them. The banks were not too keen on individual accounts for people on such low incomes. And employers were not keen, either, to force the issue without having the state's financial guarantee behind it.

The Turner report is proposing an alternative path to the same end, through the setting up of a "National Pension Savings Scheme". Under this scheme, the government would pool together the contributions to the scheme through a system of collection similar to that used for NI contributions. Workers would be automatically enrolled into the scheme, but would have the possibility of opting out. It would be cheap for the bosses - their contributions would be compulsory, but could be as low as 3% of wages - whereas workers would have to pay in 5%. However, workers would be able to save more if they so wished and their accounts would be individualised to make this possible. Unlike the State Pension, where active workers pay for the pensions of retired workers, the new scheme would generate pensions through the profits made from financial investment. Finally the management of this scheme would be subcontracted to a few big finance companies, which, claims Turner, would be able to manage it at a very low cost, because of the enormous amount of money involved.

On this basis, the Turner report claims that this scheme would be able to produce pensions worth 25% of median salary. How he comes to this figure is anybody's guess. But there are reasons to be suspicious of his calculations. For instance the 0.3% administrative cost that this scheme would incur, is one tenth of what Blair suggested for his stakeholder's pensions and even that was considered too little to be worth the bother, by the finance giants. Yet the administration involved in managing Turner's individual accounts is not substantially different from what was required for Blair's stakeholders' pensions and the temptation for the finance sharks to get as much profits as they can out of this scheme would be far greater.

Above all, just as with occupational schemes, this means that the part of workers' pensions coming from that scheme would be dependent on the ups and downs of the financial markets. And on the basis of past experience there is no more reason to believe that the finance giants would be more cautious with workers' pension savings than they are with the rest of the assets they manage. Nor that the built-in chaos of the stock market would be more benevolent towards this National Savings Scheme than it is with other investment funds.

The main difference between Turner's proposed scheme and Blair's stakeholder's pensions, however, is that it would give the new scheme the endorsement of the state and, therefore, its apparent guarantee. There is no such guarantee mentioned in the Turner report, however. Nor is it likely that any government would take the financial risk of providing a serious guarantee to a scheme that size. But apparently, Turner seems to think that this scheme would be able to lure workers into forgetting about occupational schemes and give bosses the confidence to push the change down their workers' throats.

What will happen to existing occupational funds, however, remains an open question. Will they be integrated into the new state-endorsed scheme or not? And if so, what guarantee will workers have that they will not lose out? Nothing is said about that. But this is not a small matter since at present, since £750bn is still stashed away in existing schemes.

The bosses' arrogance will be their comeuppance

What makes these attacks against the pension rights of the working class even more nauseating, is the fact that, at the same time, thanks to the generous tax rebates awarded by this Labour government, pensions are used as a channel by the capitalist class to redistribute company profits among its ranks, using more or less legal tax dodges.

Boardroom pay in the FTSE 100 companies has reached a record high, with an average pay package - including pension - breaching the £2m/y barrier for the first time. A survey published by the GMB union last November, showed that the pension pots of the CBI's 15 subcommittee chairs - the very same people who demand that retirement age should be raised to 70 years for the working class - reached up to £14m, in addition to whatever other assets these worthy people may have. Last September, the TUC's Pensionswatch showed that if the directors of Britain's largest companies took immediate retirement, they would have an average income from their "occupational" pension pot of £3,200 a week. This did not take account of any other assets they had, but was nevertheless 26 times the average occupational pension in payment.

The systematic tax evasion, through pensions, by company directors had become such an embarrassment that Brown was finally forced into being seen to "do" something about it. But not much. From what is known in specialist circles as "A-day", 6 April 2006, the tax breaks enjoyed by the beneficiaries of occupational pensions will be more clearly regulated. But as long as the individual's pension pot remains below £1.5m (enough to yield a pension of about £1,400/w, or 11 times the average), it will be entirely tax free. This will leave a lot dough out of the reach of the tax man, far more than any ordinary retired worker has any chance to see. But, as if this was not already more than enough for the rich, Brown has added a clause which says that anything over and above this ceiling in the pension pot will be taxed at a rate of 25% if the pension pot is converted into an annuity on retirement - meaning an additional gift of 15% of the excess over £1.5m, since normally this would be taxed at 40%. In addition, the new rules will allow pension pots to be invested in just about anything. At the last minute, Brown was even forced to introduce some limitations, when it was revealed that astute finance advisors had designed packages allowing pension pots to be invested in buy-to-let homes. Against the backdrop of today's housing shortage and high rents, such a state subsidy to private landlords would not have gone down very well among private tenants!

The cynicism of a capitalist class which parades its wealth with such arrogance, treats workers as disposable slaves, even in their old age, and plunders the resources of the state without the slightest concern for the consequences this may have for the vast majority of the population, can only cause anger. And it calls for a fight back.

But despite making a point of showing their concern about the issue of pensions, if only for recruitment purposes, the union leadership has been mostly busy ensuring that they were part of every commission (including Turner's) and party to every negotiation on the issue.

After the inglorious sell out by central government public services unions, which agreed to new starts recruited from April this year being forced to work until an increased retirement age of 65, more sell outs of the same kind have occurred. The GMB union called 6,000 British Gas engineers out, for five one-day strikes following an 80% vote for strike action against the company's decision to close its final salary scheme to new entrants. But on the second planned strike day, the GMB negotiators called off any further action and congratulated themselves for having got a deal whereby the company had agreed to postpone its deadline for refusing new entrants until 31 March this year!

Whether it is an isolated case, like at British Gas, whether it is a large-scale offensive, as in central government public services, or whether it is the government launching a "pension reform" of the Turner type - which Blair will probably do, if he has enough time for that before the next general election - all these are attacks aimed at the entire working class. They are aimed at the workers who are at work today and those who will be at work tomorrow. If the working class is to stop the capitalists and their blackmail, these attacks will have to be met, not with the union leaders' willingness to play along with the lies floated by the bosses and their friends in government, but with a determination to use all its collective strength.