Pension crisis - it is a slow burner

After years of overconsuming, undersaving and hoping that the housing market would provide for a comfortable retirement, there is a growing realization that the UK is heading for a massive pension crisis.

The crisis is most acute in the private sector. Today, BT confirmed the extent of the problem. It is looking to minimize their pension liabilities by raising the retirement age and reducing the pension benefit. More ominously, BT might try to push some of their liabilities onto the state. BT hope to interprete "a guarantee in respect of its scheme members to cover not only all pension benefits earned before privatisation, but also benefits earned by those who remained after going public."

It is all coming together; an ageing population, a crashing housing market, collapsing equity prices, and a rising fiscal deficit. Neither the state pension nor private sector schemes can guarantee a reasonable retirement for today's workers.

There is only one solution; those approaching retirement must stop consuming and start saving.

From the FT....

BT is seeking changes to its final salary pension schemes, including raising the retirement age from 60 to 65 and basing benefits on the average, rather than the final salary, earned before retirement.

BT confirmed that talks with its unions had been under way since May and said the moves were unrelated to the 19 per cent fall in its share price on Friday after the group warned that earnings would fall in 2008-09 because of problems at its division serving multinationals.

Analysts speculate that BT may need to cut dividends, in part because it may need to step up significantly contributions to its pension scheme. However, with only 69,000 active members out of a total of 344,000, the changes to the scheme will do little to alter aggregate liabilities.

According to John Ralfe, an independent pensions consultant, these were roughly three times BT’s market value after Friday’s share price fall to its lowest since privatisation in 1984.

Meanwhile, Mr Ralfe, in a report to be released on Monday, says that if BT’s interpretation of terms of the privatisation are correct, British taxpayers could be on the hook for about £16bn of its pension shortfall if it should suddenly become insolvent.