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How pensions changed at the end of the last millennium

30 September 2020

September was a satisfying month. I continued my explanation of how UK pension policy has evolved by charting the rise and fall of the gold-standard private sector pension scheme. A discussion with people who have long pension memories on LinkedIn revealed how the changes over the course of the 1990s turned defined benefit pension from a useful recruiting tool into an expensive liability. Over the course of two posts I explained how the introduction of new accounting standards signalled the final death knell for these schemes. I returned to Times Radio to outline what likely measures the Chancellor would unveil to replace the job retention scheme.

The rise and fall of the gold-standard pension – part one
In this post, I explain why defined benefit pensions should be described as the ‘gold standard’ – they pay an income for life which is linked to inflation. The 1990s was a period of significant change for pensions in the UK. At the start of the decade Robert Maxwell’s theft from his own companies’ pension scheme sparked the government’s Goode Review. This led to the Pensions Act 1995 which resulted in the introduction of the minimum funding requirement. This, in combination with the changes to advanced corporation tax, made defined benefit schemes look expensive.

The rise and fall of the gold-standard pension – part two
I continue the saga by explaining how accounting changes introduced at the start of the millennium signed the death knell for private sector schemes. According to the Office for National Statistics, active members of private sector pension schemes fell from 5.7 million in 2000 to 2.9 million in 2011. The new rules magnified the importance of the pension scheme in a company’s report and accounts; in particular it made it a far more important item on the balance sheet. I explain how these new standards specified how the assets and liabilities of a pension scheme should be valued.

The rise and fall of the gold-standard pension – part three
Assigning a valuation today to a stream of liabilities which happen many years in the future is far from straightforward. In this piece, I explain the concept of compounding and how it helps to build a pension pot as well as showing how reversing this concept can find a current valuation for future benefit payments. I also explain how new accountancy metrics not only shone a spotlight on the existence of pension deficits but also introduced significant volatility in those valuations. It was this combination which made so many companies close DB schemes to existing members and caused the rapid decline in the number of active members in private sector pension schemes from the start of the millennium.

Rishi’s choice
On Thursday, 24th September I presented the business news for Calum Macdonald’s Early Breakfast show on Times Radio. We discussed what new measures the Chancellor was likely to unveil to replace the job retention scheme and how these could mimic the system used by Germany to keep employees in part-time work rather than being made redundant. We also noted the emergence of ‘polo mint’ economies where towns and suburbs outside of cities thrive while the centres still struggle. This levelling-up of local areas is one of the benefits of the covid crisis I highlighted in this feature I wrote for politics.co.uk.

Charlotte Moore - post author

Charlotte Moore has been a freelance journalist since 2006, with a solid technical understanding of a broad range of financial topics along with a previous incarnation as an investment analyst. Along with journalism, she has experience of producing written material for corporates and is seeking to expand this part of her business portfolio.