Pensions: The Plain Truth

It's time to face facts: it's no longer possible for employees (including postal workers) to retire at sixty with copper-bottomed pensions. Here's why.

Following two 24-hour walkouts by postal workers across the UK in the past month, we now face two weeks of staggered strikes by employees of the Royal Mail. Each department of the Royal Mail will strike on different days, in order to cause continuous disruption over the next fortnight.Members of the Communication Workers Union (CWU) are withdrawing their labour in order to protest about job losses and insecurity, a 2.5% pay rise, and the introduction of new technology and automation aimed at modernising the group. On its part, the Royal Mail argues that it must make changes to working practices in order to compete with its private-sector rivals and stem huge losses.However, another spanner was thrown into the works when the Daily Mirror earlier this week published a Royal Mail document which proposed increasing its normal retirement age from sixty to sixty-five. This would affect the pensions of 167,000 current employees, but the Royal Mail declared that any decision on pension alterations has yet to be made.Although I am sympathetic towards postal workers and their right to decent working conditions and benefits, I have some unpleasant news for them. The honest truth is that their pension scheme -- and others like it -- is simply not sustainable. The big problem is that the Royal Mail pension scheme is a generous final-salary scheme, so it pays pensions based on worker's length of service and salary at retirement date.Thanks to lower investment returns and increasing lifespans, the cost of providing these gilt-edged pensions has skyrocketed. Hence, many schemes have fallen into deficit and need to make cutbacks in order to bring their finances back into the black. Typically, this will involve: pumping more money into the scheme (either via lump sums or higher ongoing contributions); demanding higher monthly contributions from employees; reducing the scheme benefits, either by raising the retirement age or moving from final-salary to career-average benefits; or excluding new members from the scheme, or closing it completely and switching all employees to an inferior plan (usually a money-purchase scheme where retirement income depends on contributions and future investment returns).Given that the government wants the Royal Mail to reduce (not increase) its losses, it's pretty clear that pumping more taxpayers' money into the pension scheme is not really an option. Hence, postal workers should brace themselves for a reduction in their ongoing pension entitlement. Although existing members may avoid sweeping cutbacks, there's no doubt that new employees will enjoy lower pensions.To be blunt, final-salary pensions at age sixty are unsustainable. Although the private sector has taken a knife to its pension liabilities, the public sector has been slow to respond to this crisis -- largely due to ministerial timidity in the face of strikes. This has created a 'pensions apartheid' between generous public-sector pensions and less attractive private-sector schemes. What's more, with the State retirement age moving up to 68, it is not unreasonable to expect all public-sector workers to move to a retirement age of 65, as new civil servants are now forced to do.To show you just how vast the pensions problems is, take a look at these facts, which come courtesy of Fool.co.uk and pensions guru Tom McPhail of financial advisers Hargreaves Lansdown: The Royal Mail pension scheme has a £6 billion deficit. This comes to £13,333 for each of the 450,000 scheme members, or nearly £36,000 for each of the current 167,000 workers. Ouch! Two-thirds of private-sector final-salary pensions are now closed to new entrants, according to the National Association of Pension Funds. Private-sector final-salary schemes are disappearing fast: although three-quarters of us work in the private sector, there are only 4.4 million final-salary members in it, compared to 5.1 million in the public sector, according to the Office of National Statistics. The State retirement age is set to rise to 68 by 2044. The cost of providing a final-salary pension of £10,000 a year for a sixty year old is around £270,000 (based on figures from Hargreaves Lansdown's annuity calculator). A 65-year-old man now has a 50% chance of living to age 87; a 65-year-old woman has a 50% chance of living to age 90, based on figures from the Continuous Mortality Investigation Bureau. The average contribution to a company money-purchase scheme is around a tenth (10%) of earnings, according to the Pensions Policy Institute. Anyone in a final-salary scheme receives far more generous contributions and benefits than this scheme would provide -- even with retirement at age 65 or higher.In summary, the Royal Mail's pension liability is ultimately the taxpayers' liability. However, the UK has to wake up and realise that the unfunded cost of providing public-sector pensions is estimated by pension consultants Watson Wyatt at £1 trillion, which comes to £40,000 per household. In short, taxpayers can no longer afford to finance the pensions of state workers as well as their own. That is the harsh and bitter truth of pensions provision in today's Britain, like it or not.Get your free Pocket Guide to Surviving Retirement today!More:Champagne & Caviar Or Homebrew & Chips? | The Decline And Fall Of Pensions!