Speaking from the Chair
LIFE ASSURANCE AND PENSIONS : TAKING STOCK
OVER the past quarter of a century British life offices have played a big part in extending pension provision of various kinds and in developing the pen- sion consciousness of the country. On the one hand, individuals have been making their own provision for the future through endowment and pension policies and on the other employers have been making pro- vision for their employees through occupational pension schemes. In 1956 another important step was taken. Self-employed persons and others in non- pensionable employment have by recent legislation now been permitted to set aside contributions out of gross income to provide themselves with a pension on retirement.
In view-of all this background it is interesting to consider some of the basic principles which the life offices keep in mind in building up their extensive pension business. Broadly, under a life office scheme, the benefits provided are commensurate with the contributions of the employer and the employee. Within this frame- work there are many different ways in which schemes can be arranged to meet the varied requirements of differing industries. Variations can be made in the normal pension age; in the level of benefits; schemes can be contributory or non-contributory and there is flexibility in dealing with past service. Pensions can be based on average or final salary.
PENSIONS MUST BE PAID FOR
The most important feature of any pension scheme is the method of financing. It is the framework on which the rest is huilt. Gradually the fact has become accepted that the only effective way of ensuring that there is sufficient money available to meet pension commitments when they arrive is by collecting con- tributions in advance and investing the money in the best possible way.
If pension responsibilities are squarely faced, the problem of cost is always a serious one. In particular there is the difficult problem when a new scheme or an extension of an old scheme is in contemplation, of those people who are nearing retirement age and for whom inadequate provision has been made in the past. Should consideration be given to the long years of service they have put in? As an example of the weight of this problem, the annual contribution re- quired from age 25 to provide a pension of a half of salary (assumed to be constant throughout service) is about 5 per cent. of salary. The corresponding figure for a man aged 55 is not less than 40 per cent. For a private scheme this problem of cost and particularly of the cost of past service cannot be avoided. Nor in fact can it be avoided by a State scheme, although it can be concealed by placing some of the burden on the taxpayer or on the working population of future generations.
TAX RELIEF
Broadly speaking, employers and employees enjoy tax relief on the contributions they pay into an ap- proved pension scheme, but the pensions themselves, when they are eventually received, are subjected to taxation. This is not always appreciated, the general impression in some quarters being that because pay- ments to pension schemes are relieved of tax the Exchequer subsidises the cost of the scheme to that extent; that the Revenue will in due course receive tax on the pensions as and when they are paid is overlooked.
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