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The great pensions rip-off

The government’s latest changes to workers’ pensions will mean most people will be worst off. It is another attack on the welfare state and one designed to boost the coffers of the City of London, writes Keith Spencer

Pensions are in crisis. Workers are having to work longer for a smaller pension – if they have one at all. Firms are closing their final salary schemes, these at least offered a chance of a decent pension. Successive governments have eroded the value of the state pension. The trade union leaders have failed to unite and defend their members’ interests.

Now, the Tory/LibDem coalition has introduced a flat rate state pension. The rate introduced after 2017 will be £144 a week. More than the current pension and without the need for means testing.

But dive deep into the detail and we find that the coalition has introduced a pension cut for nearly everyone. In the short-term there are winners – self-employed and stay at home mothers – but the Institute for Fiscal Studies finds “These proposals imply a cut in pension entitlements for most people.”

Even some of the short term winners such as stay at home mothers will “in common with almost everyone else… end up with a lower pension at the state pension age under the new system than they would do under the current system.”

Also the government has abolished a national insurance relief on final salary schemes, with the result that more of these more generous schemes will close.

The attack on pensions is part of the war on welfare state: privatising health, cutting benefits, forcing people into work with no pay and handing over services to the private sector firms with vastly profitable contracts.

But for all the talk of a crisis in pensions, bosses are still leaving their jobs with very generous pensions – and so are MPs, many of whom recently recommended a 32% pay rise to themselves.

The coalition has also introduced a new pension scheme for workers. The new auto-enrolment scheme will sign up 10 million workers to a pension. But as we shall see blow this is more likely to be yet another financial scandal.

Pensions: the facts

Pensions are deferred wages taken either through taxation or company schemes. The deferred wages are paid into schemes, which are then invested in stocks, shares or government bonds to provide a pension on retirement.

There were 27.2 million members of pensions schemes in the UK in 2011 with 13 million in public sector schemes and the rest in private sector. Of these just over 8 million were active or paying in: 5.3 million private sector workers and the rest in the public sector (from Occupational Pension Scheme Survey, 2011 Annual Report, Office of National Statistics, September 2011)

The private sector workers were in 44,000 schemes with about half open to new members; the others were closed or winding up. About 35,000 schemes had 11 or fewer members. There were fewer than 500 schemes that could be considered large with more than 5,000 members. We shall see later in this article how these small schemes fail workers.

Traditionally, pensions were Defined Benefit (DB) or final salary schemes where the employee would know how much they would receive on retirement, usually based on their final salary. But over the past 20 years these schemes have been closing, in 2011 only about 13 per cent of the open private sector schemes are final salary (ONS).

The closure of final salary schemes was partly prompted by concerns over shortfalls, the difference between what was being paid in by working members and paid out to retired members. Often this shortfall was brought about the company taking a “pensions holiday” when it stopped paying into the scheme. Tax changes by Labour and Tory governments have also affected the viability of final salary schemes. Also the poor state of the financial markets where the schemes are invested has affected viability.

Public sector workers were in larger schemes and usually final salary but over the past few years Labour and Tory governments have been eroding the terms and conditions, often closing them to new members and then increasing the amount paid in.

The replacement to final salary is Defined Contribution (DC) schemes, where workers pay in but the amount received on retirement depends on the success or otherwise of the investment.

The private pensions industry has about £900 billion of assets (and about the same amount of liabilities) and receives about £80 billion in contributions each year (Office of National Statistics, March 2010). As final salary schemes are closed down, DC schemes account for an increasing share of this amount, about £500 billion and growing.

Who benefits from pensions?

But the problem with DC schemes is that the beneficiaries are often not the workers paying in.

The research organisation the Pensions Institute reported last October that “most schemes are too small to be efficient.”

The very small schemes, less than 11 members, accounted for more than nine out of 10 existing private sector pension schemes but were likely to pay employees very little on retirement. The reason is twofold: first, pensions have been invested in the poorly performing stock markets. Second, the investors, the finance firms that handle the pension investments, are charging exorbitant fees that eat into the pensions. Large schemes with thousands of members may have the power to prevent this, but the thousands of small schemes are at the mercy of unscrupulous investing firms.

The Pensions Institute says: “Members in smaller schemes generally have paid up to six times (if not more) the annual charge that applies to those in the largest schemes, which makes the member outcome a lottery”

So, the vast majority of workers are providing a nice salary for investment funds in the City of London and elsewhere. Unless the government decides to take on investment firms, which is unlikely, auto-enrolment will create thousands of more small schemes that will be creamed off by the parasitical finance industry.

In some cases this creaming off the wealth takes criminal form. In the 1980s the Tories introduced personal pensions, whereby individuals could set up their own schemes. This led to an orgy of miss-selling by the finance industry as the Tories failed to regulate the industry. Years later and after many court cases it is estimated that the whole fraudulent enterprise, aided by the government, cost about £15 billion. But the same Tory government abolished the British North Sea Oil Company, which had been set up by Labour in the 1970s to obtain some of the oil industry’s wealth. The Norwegian equivalent, The Government Pension Fund, is hugely in surplus and provides a good pension for all.

When there is a choice between good state provision and private sector rip-off the Tories prefer the latter.

Who controls workers’ pensions?

In addition to providing an easy living for investment firms, or a material base for what Lenin called the “coupon clippers”, workers’ pensions also flood into the City of London to be used for the finance industry.

Pensions provide vast amounts of money for investors, traders, bankers and every other sort of leach upon the working class. This money is key to the workings of finance capital, it provides the cash for all sorts of deals and buyouts, often detrimental to the working class as a whole. And the financiers are risking other people’s money not their own.

The TUC used to boast that the working class owns half of the means of production because of the shares owned by pension schemes. Except that UK workers have no control over where their money goes. During the Miners’ Strike of 1984/5, the National Union of Miners went to court to establish control of their own pension fund in order to prevent it being invested in Apartheid South Africa and open cast mining operations. The NUM lost.

The TUC can boast all it wants but the workers don’t own or control any fraction of the means of production. Their money is handed over to the bosses and their hangers-on to provide these strata with a high standard of living and money to invest and enrich themselves further.

Pensions and the finance industry

To give some idea of how much the finance industry takes from workers’ pensions let us look at the last decade. According to Making Pensions Work (2010, written by Richard Murphy of the Tax Justice Network) in 2007/8, the total pensions paid out were £118 billion. That breaks down into £58 billion state pension, £25 billion from state employment pensions (ie health, education and civil service) and £35 billion was from the private sector.

We saw earlier that the private pensions industry was worth about £900 billion with about £80 million paid into it every year. But it pays out only £35 billion a year. And the amount of subsidies given to the private sector pensions industry through tax and national insurance relief was £38 billion.

So the government was providing more in subsidy to the private sector pension industry than it was paying out!

For the decade up to 2008/9, the report found that subsidies for the industry were £300 billion or half of the total government debt (£617 billion) in March 2009. And the Tories and bosses claim that this government debt makes public sector pensions unaffordable.

During this period the OECD estimates that the returns on UK pension investments fell every year between 2001 and 2010 (OECD report on pensions, June 2012). Other countries fared much better, Germany increased 3% each year and Poland 4% each year.

And from 2001 to 2008 we were supposedly going through a great financial boom. Workers would have made more by putting their money in the bank.

So even with government subsidies and a boom, the UK pensions industry still can’t make a decent return with all the money that workers pay in.

The reason is that workers are at the mercy of the City of London. The money is being paid in, there are tax breaks for companies, but the control of these pension schemes are securely in the hands of Britain’s finance capital.

The financiers are siphoning off our money to feather their own nests and provide themselves with a material basis for their own existence. They are what Lenin called “rentiers”, people who live off the interest and fees from the money of others and a product of the growth of imperialism.

“Further, imperialism is an immense accumulation of money capital in a few countries, amounting, as we have seen, to 100,000-50,000 million francs in securities. Hence the extraordinary growth of a class, or rather, of a stratum of rentiers, i.e., people who live by ‘clipping coupons’, who take no part in any enterprise whatever, whose profession is idleness. The export of capital, one of the most essential economic bases of imperialism, still more completely isolates the rentiers from production and sets the seal of parasitism on the whole country that lives by exploiting the labour of several overseas countries and colonies.” (Lenin, chapter 8, Imperialism: the Highest Stage of Capitalism).

The UK is the oldest of the imperialist states and has the most entrenched and venal financial elite that distorts the development of society. These people through their lobbying, power, influence, bribery and gerrymandering twist government reforms. That is why we have a vast number of tiny pension schemes that do not benefit the workers but do supply the rich with even more money.

Worldwide, pensions amount to more than $30 trillion (world GDP is about $70 trillion), all of it in the hands of the rentier class. Along with the profits of industry that are stolen from the working class, exorbitant rents, and other robberies such as insurance and banking, we can see how the ruling class maintains its wealth and support through distributing all this money to its supporters.

The reformists baulk at pension fight

Yet faced with such blatant swindling, the response of the Labour and trade union movement has been miserable. Labour refused to raise the state pension and link it to earnings, despite campaigns by pensioners’ groups and a huge majority when it came to power in 1997. Instead, Gordon Brown brought in his pension credit, a means testing system that put older people at the mercy of the Department for Works and Pensions.

Labour also attacked public sector pensions, particularly civil servants and local government claiming that final salary schemes were unaffordable. It commissioned the Turner Report that recommended worsening public sector pensions.

More recently, the unions botched a united fight back against the coalition’s attack on public sector pensions. A united campaign was launched including Unison, Unite, FBU, PCS, NUT and other unions under the slogan of “Fair Pensions for All” and which culminated in a day’s strike action of two million workers.

Whatever the inadequacies of the slogan, it at least offered the idea of a solution for all workers, public and private. With united action and some well thought out proposals it might have been possible to make the case for a better state pension; protection of health, education and civil service pensions; and offer workers in the private sector something better than the auto-enrolment scheme.

Instead, the union leaders caved in one after another leaving only the PCS and NUT to organise some sort of fight back, which predictably came to nothing. Once each union went its separate way, all pretension to “Fair pensions for all” was dropped and the Tories could portray those workers willing to fight as selfish and greedy.

Now the Tories will ensure that the vast majority of workers in public and private sectors will be worse off.

The future for pensions

The vast majority of people in the world don’t have pensions. Right-wing ideologues use this fact to demand workers give up their pension entitlements to “compete globally”. For example, the Tea Party’s Glenn Back has called on US workers to hand over their pensions to make the US great again, while of course demanding that the rich keep hold of everything they have. But it’s not just the extreme right, the IMF, OECD and World Bank have been calling since the onset of the crisis in 2008 for a reduction in workers’ benefits, welfare, health and pensions.

Where pensions exist, the bosses want to reduce their payouts but increase the amount that is paid in so as to provide money for financiers.

The communist solution is to fight for pensions for all, early retirement and sharing out the hours.

• Nationalise the private pension industry under workers’ control. We don’t need thousands of schemes that benefit only the finance industry, we need one scheme that will benefit the working class. Any surplus can go to towards investing in public works such as housing, transport, schools, hospitals and local facilities. Other countries have hugely profitable state schemes, the UK should have one controlled by the working class.

• This national scheme can be merged with the existing state provisions and paid for with a steeply progressive income tax and a tax on wealth. A well funded state pension would mean that there would be no need for a secondary “works pension” which discriminates against those who raise children, are disabled or unemployed.

• The retirement age should be reduced not extended. Workers should enjoy an even greater part of their lives in recreation, looking after their family or friends, pursuing other endeavours other than work. Again this would help reduce unemployment. Those who wish to continue working can do so with declining hours or be found socially useful employment helping in the local community, schools or workplaces.

• Share out the hours with no loss of pay or pension. This would abolish unemployment and overwork while providing everyone with work for the benefit of all.

But this would only provide respite for the workers of the UK. All toilers in the world should have a decent standard of living in childhood, adulthood and in retirement. For that to happen we need to overthrow capitalism, and take the wealth and economy onto our own hands. We need to replace capitalism with a planned socialist economy based on providing for people’s needs rather than accumulating profit.

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