Our ability to plan for a reasonable retirement is under severe attack. But why this is happening?

There are three main types of pensions: private pensions received by those who worked for private corporations, public pensions for those employed in the state sector and retirement pensions paid by the state to those over a certain age.

The first two types are based on a pool of investments in financial assets that the companies or government contribute by paying regular amounts of cash. The state pension is based on money collected from taxation and paid into a big pot. This money is not invested in financial assets and is simply washed through the pot and paid out to those of retirement age.

Capitalism makes profits from the extra value added by human labour – whether manual or intellectual – to the production of goods or services. The only way a company can make more from the sales of goods or services is by increasing the added value that it keeps for itself. It can do this in a number of ways: cutting the labour force and make the remaining workers carry out the same work for the same pay; increasing the levels of productivity; reducing pension levels. Pensions are in effect a form of deferred wages – so by reducing pensions the employer is effectively cutting wages.

Historically, the type of pension paid out by private companies was a defined benefit scheme (DBS). These provided a guaranteed income based on the number of years of employment and on the employee’s final years’ wages.

These pensions were a guaranteed liability to the company which had to be matched by the pension funds assets in their current investments. This is done by taking the future liabilities and discounting them back using future estimates of interest rates to calculate their value today and comparing this to the value of assts held in the pension fund. As interest rates declined and stock markets fell, there was shortfall between the current value of future guaranteed pension payments and the current value of the company’s assets.

So companies have been moving to defined contribution schemes (DCS) which pay out at retirement the return of the investments a company’s pension scheme has made. They offer no guaranteed retirement income and shift the risk from the company to the employee. Their future retirement income becomes a gamble on the financial markets.
Normally companies in the same industrial sector will seek to take over weaker ones with lower profit rates and seek to implement these measures described above to increase the rate of profit. They will do this through a merger or acquisition using an investment bank as an adviser on the deal. They will pay for the new company by issuing new shares, using cash reserves or issuing bonds on the financial markets.
Investment bankers who worked on these deals learnt how these takeovers work – make workers redundant, make them work harder for less, reduce employees’ pension rights. At the same time interest rates as mentioned above were historically very low. This encouraged investment bankers and fund managers to set up private equity firms. They could survey companies that were ripe for takeover – the workers could be exploited some more – borrow money at low rates to buy the company and implement these measures. They could improve the company’s profitability and sell it at profit or sell its shares on the stock market. Even better if as in the UK you keep your profits offshore and receive tax incentives from New Labour to do so.

This is what has happened with Private Equity Capital schemes. They looked for companies with DBSs and bought them up in order to replace them with DCSs to reduce the workers’ deferred wages, their pensions, and increase profits.
Ironically the era of private equity capital may be coming to an end as interest rates increase; banks have a reduced appetite for lending on risky investments; and the recession makes the prospect of profits less certain.

But it is an essential tool that companies in the UK and other mature western economies have used to try and reverse the decline in the rate of the profit – this has been falling in the UK for last ten years with manufacturing net profit down to 7% from 15% and the services sector down to 14% from 20%.

A second major problem for private companies has been the decline in share markets over the last ten years. The FT-SE 100 index, measuring the performance of the largest 100 UK companies’ share prices, has declined by 22% in the ten years to the end of 2009. Adjusted for inflation this is an incredible 40% fall in value.

The bulk of pension contributions are invested in the ordinary share capital of private companies through the stock market, although there has been a big shift from share capital to government and corporate bonds because of the risk that share capital will not appreciate enough to match future liabilities. This is so particularly in the UK where the stock market’s weakness has reflected the general weakness of British capitalism.

A third major problem is a back door tax on pension funds that Gordon Brown introduced when New Labour was elected in 1997. He abolished a tax credit on the dividends received by pension schemes from owning ordinary share capital. This reduced a pension fund’s income by 20% on the ordinary shares it owned. Over the course of someone’s working life this is likely to reduce the final value of their pension by around 15%.

A further self-inflicted problem for pension schemes was that the Thatcher government allowed them to take a contribution holiday if the present value of their assets was greater than their estimated liabilities.

A final problem is us baby boomers. We are living longer than investment mathematicians estimated in the past. Our longevity means that companies and
governments are faced with many bigger future liabilities than was previously estimated.

For government run and privately run pension schemes, there is a huge gap between future liabilities and the value of the assets they hold to meet them. In the public sector this gap is estimated to be between £770 billion to one trillion pounds. This will be reflected in the annual deficit and public debt. The CBI is urging a switch from DBS to DCS to reduce this gap. The Brown government has stepped up this move and we expect whoever forms the next government to continue these attacks.

This is also a huge problem for private corporations; for the FT-SE 100 companies this is running at about £96 billion. It threatens the very solvency of many private companies – the UK Readers Digest bankruptcy was caused by this gap.

It is ironic that a financial system that is supported by our money – about 50% of the global stock and bond market worth £120 trillion is owned by non wealthy individuals through pension, insurance and investment schemes – is threatening our ability to have a poverty free retirement.

The UK state retirement scheme already suffered when the Thatcher government broke the link between increases in earnings and the state pension. Governments around the world are trying to reduce the future burden on their ballooning deficits and debt by reducing the cost of state pensions. They mainly do this by increasing the retirement age. Here the Conservatives propose raising the state retirement age from 65 to 66. In Greece the proposal is incredible 53 to 67.

We are seeing a global assault by capitalism on all our pensions – private, public and state. This is part of their strategy for making working people pay for their crisis Socialists must seize the opportunity to unite private and public sector workers and the poor in a campaign to defend our retirement provision and work towards an alternative solution – one not dependent on the whims of the markets or of capitalism itself.