The true cost of Britain’s failed pensions

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For the next 50 years, there will be a large legacy of pension commitments, made and received in good faith but identified with companies whose current owners have no commercial interest in fulfilling the responsibilities their predecessors assumed.

I was surprised, not so much at what was said, as at the identity of the person who said it. He was the hard-headed American boss of one of the most aggressive groups of City of London traders. “Every year, the financial services business lets some people down. Fixing their problem is the price we pay for continuing in business.”

He had understood that the political alternative to generous compensation for business failure was ever more intrusive scrutiny and justified resentment of what City folk do.

Almost every major extension of regulation of financial services has followed a big scandal in which people did not get what they had reasonable cause to expect. The political fall-out makes legislation inevitable and the associated political climate is rarely conducive to good regulation. The failures led to banking supervision, deposit protection, insurance solvency regulation, policyholder protection, the Securities and Exchange Commission, Sarbanes-Oxley, even to rules to cover the supply of Christmas hampers. In each case, we hear the thud of the stable door being thrown shut behind the bolted horse.

The growth of regulation as an alternative to compensation is the background to the High Court ruling last week over the British government’s responsibility for people who lost pensions when their occupational pension schemes failed. The problem has been decades in the making and the consequences will be decades in the unravelling.

In the heyday of occupational pensions in Britain – from the 1960s to the 1980s – most people in the industry denied that failures in the system were possible. No one guessed that Robert Maxwell, disgraced media magnate, drowning in the seas around the Canary Islands would mark the start of the unravelling process.

Maxwell’s pensioners were bailed out. The City acknowledged the truth of my friend’s observation – that their acceptance of responsibility was the cost of business freedom. The Goode report that followed, which the government broadly accepted, took a different line. It did not recommend a general compensation scheme, but instead argued that sufficiently extensive regulation would prevent a recurrence of problems.

The US had introduced a co-insurance scheme for occupational pension schemes – PBEC – 20 years earlier. This has not worked perfectly but it has broadly succeeded in giving people in collective schemes confidence in retirement security without imposing unmanageable burdens on other employers. The UK would inevitably follow this lead but did not do so until 2005: 20 years after my friend’s remark, 30 years after the US and 10 years after the missed opportunity of Goode.

Hence the plight of the pensioners who took the government to court, who lost money after Maxwell but before the introduction of co-insurance. The case hinged on whether leaflets the government had issued gave a misleading impression of the security of occupational pension arrangements. But, while this is the key to the legal argument, there are broader issues of morality and policy. When financial services let some people down, fixing such problems is the price of a continued licence to operate – and if the costs are sufficiently high, the balance will fall, as always, on the public at large.

Of all the people ill served by financial services, the victims of failed occupational pension schemes are probably the most deserving. They did not choose to invest in the pension funds their employers sponsored, they bear no responsibility for the failure of either the parent company or the scheme and for many the amounts involved represent the greater part of their life savings.

For the next 50 years, there will be a large legacy of pension commitments, made and received in good faith but identified with companies whose current owners have no commercial interest in fulfilling the responsibilities their predecessors assumed. The government’s claim that last week’s ruling might cost it £15bn ($29.4bn) is wildly exaggerated. But we will be lucky if the final bill for sorting out decades of good intentions and minimal foresight turns out to be so low.

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