A Submission to the Pension Commission 


Association for Accountancy & Business Affairs (AABA)


The impending pension crisis has been portrayed as an economic crisis rather than a failure of political policies. It should be a matter of national shame that a rich country like Britain, world's fourth biggest economy, boasting record corporate profits, is unable to provide a decent pension. It is even worse the well-off, company executives, employer represnetatives and others are advocating policies which seek to erode people's hard won rights to a decent pension. It should be noted there is no pensions crisis for many company executives and a rich  elite who, regardless of their performance, continue to receive generous pensions.

It is only when ordinary people ask for a decent pension that the notion of a 'crisis' is raised.

We ask the Pensions Commission to look at the root cuases of the present crisis. Without this, there can be no lasting reforms.
Instead of blaming employees for not saving enough, living too long and having the audacity to retire at the age of sixty-five, attention needs to focus on the political policies that have nurtured the crisis. These include persistent and increasing inequalities in income and wealth distribution, regressive taxation, wealth transfers from employees to companies, abuses in the financial sector and the investment of pension savings in the stock markets.


1. Ordinary people would love to save for old-age but most barely earn enough to afford a house, high transport and energy costs or educate their children. This hardly leaves enough to save for a pension.  The average annual wage of £25,000 is distorted by unrestrained fat-cattery at the top.  Nearly 60% of British workers earn less than the average wage and cannot afford to enter the housing market. Where people can afford to buy a house, 20% - 40% of their income is taken up by mortgage repayments, leaving precious little to put away for pensions. Young workers, those on the minimum wage and in the retail and hospitality industries can only dream of building a pension pot. Without a decent disposable income people cannot save for pensions. In recent years, British economy has been sustained by high personal spending. If poorly paid citizens  were forced to to save even more, it would lead to a spending crisis and Britain would be pluged into a full recession


2. The proportion of people with low incomes has remained roughly constant since 1979, despite an average income growth of over 40 per cent. The wealthiest 20% of the population earns 17 times as much as the poorest 20%. The national share of the wealth of the poorest 50% of the population has shrunk from 10% in 1986 to 5% in 2002. A large section of the population simply does not have the means to save enough for a pension. Successive governments have done little to reverse income inequalities and create a climate for ordinary people to save for pensions.


3. The regressive taxation policies of successive governments have further eroded the ability of people to save for pensions. Around £100 billion of taxes that could provide generous pensions for all are evaded or avoided by multinational corporations and rich individuals. Rather than tackling the abuses, governments have shifted taxes on to labour, small and less mobile businesses. Despite record economic growth and increase in corporate profits, the 1990-91 corporate tax take of £21.5 billion increased to £33.5 billion in 2004-05. For the same period, the income tax take increased from £48.8 billion to £122.8 billion. Individuals on the minimum wage end up paying 10% of their income in tax and national insurance contributions, whilst 65,000 wealthy elites living in Britain but pretending to be domiciled elsewhere pay little or no income tax.  After taking account of indirect taxes (e.g. VAT) the top fifth of earners pay a smaller proportion of their income in tax than the bottom fifth. Yet the government makes no connection between its tax policies and the pensions issues.


4. Pension contributions by employers are part of a legal and moral contract, but successive governments have enabled companies to transfer huge amounts of wealth from employee pension schemes to shareholders. In the 1980s and 1990s, many companies took pension holidays i.e. they did not pay the agreed amounts into the pension schemes. At the height of the stock market booms, many also expropriated pension scheme surpluses to enable them to boost profits, dividends, executive salaries and bonuses. Employees have been left with inadequate pensions. Companies should be asked to make good the expropriations. Directors of the companies refusing to do so should be prosecuted. All employers should be required to contribute to a pension scheme run for the benefit of employees.


5. To build a nest-egg for their old age, many people put their savings in commercially marketed pension schemes, endowment mortgages, insurance policies or specialist bonds. But such savings are not safe and do not guarantee an adequate pension or a decent return. The Maxwell type of scandal is still possible. Nearly five million people have lost some £13 billion in the pensions mis-selling scandal. Over six million people have been short changed to the tune of £50 billion in the endowment mortgage scandal. The precipice bonds, split-capital investments, Equitable Life and other episodes further show the failures of the ‘light touch’ regulation and governments to safeguard people’s savings. Company executives devising and marketing the scams made millions in salaries, bonuses, perks and profits. None have been prosecuted. None of the offending companies have been wound up to compensate their victims. Without a clean-up of the financial services sector, people will have little faith that their savings or pensions are safe.


6. Instead of real assets, people’s pension savings are invested in the biggest casino of all times, the stock market. The value of the pension pot is shaped by speculative frenzies and market bubbles rather than investment in real assets. Bankers, financiers and stockbrokers always win because they receive commission whether the securities are bought or sold. The pension fund managers receive lucrative financial rewards for short-term gains, but escape accountability when their gambles don’t pay-off. There is no transparency about how the pension funds are used. Such a structure cannot provide a long-term stable pension policy.


7. The pension crisis is a failure of political policies pursued by successive governments. Reports written by corporate elites may advocate compulsory savings by employees to provide for pensions, but many people are simply not in a position to save. For years to come, many debt-ridden graduates will be busy repaying their loans and thinking about finding adequate housing and raising families rather than saving for their pensions. Graduates have been placed in their position by government policies. The housing bubbles are encouraged by the use of blunt fiscal policies that seem to rely mainly on interest rates to regulate the economy.


8. Any government addressing the pension crisis needs to reverse the rising income inequalities and end the organised looting of people’s savings by the finance industry. The government needs to end the regressive system of taxation that prevents people from making adequate provision for their pensions.


9.  The government  needs to clampdown on tax avoiders to ensure that the democratically agreed taxes are collected and redistributed. To check the stock market bubbles, the government should levy a tax on the speculative flows to fund pensions for ordinary people.


10. The government needs to have a fresh look at the financing of hospitals, schools, roads and homes. Instead of paying exorbitant sums through the expensive Public Finance Initiative (PFI) and the Public Private Partnership (PPP) initiatives, public assets should be financed directly from employee pension funds. Such a way of financing public assets, provides cheaper money and also increases the pension resources available to employees.


Overall, we do not support the idea of working employees to death i.e. raising the retirement age since that is discriminatory and will not apply to the rich.  We do not believe that higher pension contributions or forced savings by employees are an option, especially as many people do not have adequate disposable income. All employers should be required to contribute to a pension scheme run for the benefit of employees. Government should clamp down of organised tax avoidance and use the revenues to finance pensions. It should also develop policies to reduce income inequalities.


Prem Sikka

AABA Director
26 September 2005