Lord Turner wants us to delay retiring till 70, but only a squeeze on business can save workers from ending their days in poverty

Do political parties care about pensions and pensioners? As people rush to draw their pensions before the minimum age rises, there have also been reports that more and more companies are either abandoning or diluting good pension schemes. This is sure to condemn millions of people to retirement poverty and misery.

The UK has a comparatively poor record on pensions. A European commission study showed that Britain's pensioners have the fourth highest level of poverty in Europe and are worse off than their counterparts in Romania, Poland and France. A report by the work and pensions committee stated that despite winter fuel payments, pension credits and large increases in state pensions since 1997, nearly 2 million pensioners live in poverty and have to make hard choices between food, travel and heating. Since 1997, cold-related diseases have claimed the lives of nearly 260,000 pensioners. In 1980, the Conservative party broke the link between the state pension and average earnings. If that link had been maintained, a single person would now receive additional £2,300 in pension each year and a couple nearly £4,500. Through the Pensions Act 2008, Labour has promised to resume the link between the state pension and earnings at some point between 2012 and 2015. This, though welcome, will not do enough to improve the pensioners' lot.

The predictable response from neoliberals is typified by multimillionaire Lord Turner, chairman of the Financial Services Authority, and considered to be the architect of Labour's pension reforms. Without explaining any of the human consequences, he suggests that the retirement age should be raised to 70 by as early as 2030. Such a proposal effectively heaps blame for the pension crisis on workers and lets corporations and governments off the hook. In any case, his proposals have serious flaws. It is doubtful that many manual workers can continue to work into their 70s. In a static and shrinking economy, increasing the retirement age will not create employment opportunities for young people. Many women take time out of employment to bear and rear children and do not have resources to provide for pensions. Many innocent people fall victims to recessions and will not be in a position to set aside resources for retirement.

Neither the work and pensions committee nor Lord Turner deals with the underlying causes of the crisis. The real problem is that workers' share of the gross domestic product (GDP), in the shape of wages and salaries, has declined. With the Thatcherite weakening of trade unions, it declined from 65.1% in 1976 to 53.2% at the end of 2008 (see Table D). This has been unevenly shared, with fat cats grabbing the biggest share. The biggest beneficiaries of the squeeze on wages have been corporations and their shareholders. Smaller wages erode workers' ability to provide good pensions. Under the new pensions legislation, from 2012 most employees will be automatically enrolled into a saving scheme for pension and required to make a minimum contribution of 4% of their earnings. But 4% of little remains little and cannot solve the pensions crisis, or help women or the unemployed.

Even if people manage to save for pensions their savings are not safe. The finance industry has plundered the savings of ordinary people and thus destroyed their dreams of a comfortable retirement. Pensions mis-selling, endowment mortgage scandals, payment protection insurance and other rackets have robbed many people of their savings. The monies handed over to the savings industry are gambled on the stockmarket rather than invested in real assets. The financial dealers pick up their bonuses and commissions while hard-pressed savers pick up the losses.

Governments can and should provide decent state pension through progressive taxation policies, but many major companies resent paying taxes. Almost every day, companies hold elected governments to ransom by threatening to relocate elsewhere unless their demands are met. Despite mantras of corporate social responsibility companies appease stockmarkets and prioritise return to shareholders by squeezing employees and condemning millions to a life of retirement hardship. Governments simply twiddle their thumbs.

Even in the so-called golden age of pensions, the UK pensioners' lot is not a happy one. The erosion of final salary pension schemes is set to create a new era of hardship. The pensions crisis cannot be addressed without improvements to the workers' share of the GDP and shackling of the finance industry and the tax avoidance industry.

Of course council employees should have a decent retirement. But a funding shortall should not be met by taxpayers alone

Today's Times suggests ministers are planning significant changes to council workers' pension arrangements – and probably to most other public sector pensions, too. Naturally, unions have reacted angrily, while taxpayer lobby groups welcome the proposals.

In my view, however, change is inevitable. With private sector final salary schemes across the country in deep deficit, employers are desperately looking for ways to reduce future pensions, or are closing schemes altogether. These economic realities cannot escape the public sector. The costs of these pension commitments have soared way beyond all previous expectations, as public sector employment levels and salaries have risen much faster than expected and workers are living ever longer.

Like almost all private sector schemes, local authority pension funds are in deficit (an estimated £60bn) as investment returns have not kept up with rising pension liabilities. Council tax increases alone cannot fund this shortfall, especially as the number of workers retiring will rise sharply in coming years. Already, about a quarter of some areas' council tax receipts is spent on pensions, and there is a limit to how far this can increase without jeopardising services or risking taxpayer revolts.

Ultimately, central government – that is, taxpayers across the country – will be forced to make up the difference between what councils can afford and the pension obligations they are committed to. But they already underwrite all other public sector pensions and, unlike local authority pensions, most public sector schemes are unfunded, which means absolutely no money has been set aside to pay the future pensions. Taxpayers in years to come will somehow have to find the money.

Government has not properly budgeted for this, having consistently tried to hide the true costs. When considering public sector pay, comparisons are generally made with the private sector, but the costs of pension accrual are not factored in, almost as if they do not exist. Of course pensions are paid many years hence, but the costs are nevertheless real.

A public sector pension is now probably worth about 30% extra salary, but public workers contribute well below 10% to their pensions, and sometimes nothing at all. Taxpayers have to make up all the difference. Also, unlike state pensions, there is no flexibility in these arrangements. When it comes to national insurance pensions, government can decide to change the parameters in order to control taxpayer costs. Indeed, national insurance pensions have been cut over the years, and pension ages will rise sharply, especially for women, as we are all living longer and healthier lives.

Public sector pensions cannot escape such realities for ever, and the leaked proposals may herald a new round of reform. It is important to stress that any changes will not affect existing pensioners and will not reduce pensions that existing workers have already accrued.

However, unrealistic expectations will have to change, and we need transparency on the true costs of public sector pension commitments.

Workers are likely to have to either contribute much more each year or face the choice between working longer or receiving less pension in future.

Yes, of course public sector workers deserve a decent pension, but so do all pensioners. With such a low state pension, is it sustainable for good public sector pensions to be increasingly funded by taxpayers, who themselves have no such generous pension arrangements?

Public sector pensions should not be an alternative social welfare pension that is denied to, yet supported by, other taxpayers.

State-owned bank plans to cap increases in the pensions of more than 60,000 workers to 2% and reduce the lump sum payable on early retirement

Thousands of staff at Royal Bank of Scotland face steep cuts in their pensions after the state-owned banking group said it planned to cap increases in pensionable pay with immediate effect.

More than 60,000 staff were today told the bank intends to restrict final salary retirement incomes to cut the costs of providing guaranteed pensions.

The bank said it would cap the amount of pensionable salary increases to 2% annually or the rate of inflation, whichever is lower, and reduce the lump sum payable on early retirement.

The plan sparked protests from the Unite union which said the cuts added "insult to injury" after the bumper pension paid to former RBS boss Sir Fred Goodwin. Under the cost-cutting plan, RBS expects to cut its pension liabilities by £500m in the first year and gain £100m in annual savings.

RBS head of human resources Neil Roden said: "The rising cost of pension provision is an issue for RBS. Only one third of our staff are members of the UK defined benefit pension scheme, which we closed to new members in 2006.

"The reforms seek to strike a balance between reducing the costs and future liabilities of the scheme to the Group, with doing what we can to protect the welfare of existing staff and scheme members."

A spokesman for the bank said the scheme would protect low paid staff. "Anyone who joined before the scheme was closed to new members in 2006 will continue to accrue benefits, and if they stay in the same job they won't be affected nearly as much as staff who get large pay rises from promotions," he said.

RBS is due to meet union officials on Thursday for talks on the proposed changes, which it hopes will be completed before the end of November.

National officer Rob MacGregor said: "This is a body blow to tens of thousands of staff working at RBS. The company intends to cap pensionable future pay rises and promotions at 2% which will erode workers' pensions over time.

"Unite will support its members in any action they choose to take to defend their pensions." RBS is also proposing to reduce the severance terms for those over 50 who choose to take an immediate pension.

But some pension experts said RBS staff were fortunate as the bank operates one of the last non-contributory final salary pension schemes in the UK. Depending on the age of the member, the bank will be paying between 20% and 50% of staff salaries into the pension scheme. Last year RBS earmarked £800m of its £20bn taxpayer funded rescue package to shore up the schemes. The most recent figures show the £25bn of assets in the fund fall £2bn short of its long term liabilities.

Independent pension consultant Ros Altmann said: "If the bank had not been saved by the taxpayer then it would be in the pension protection fund and the scheme would be closed."

Liberal Democrat Scotland spokesman Alistair Carmichael said he sympathised with staff who had witnessed Sir Fred Goodwin's escape with a large pension pot. "Considering Fred Goodwin managed to get away with much of his massive pension despite his catastrophic management of what was the UK's largest bank, it seems a little tough that it is those whose jobs he endangered who have to make savings."

Sir Fred Goodwin took a pension of £703,000 when he left the bank, although he has since agreed to lower his pension income to £342,500 a year.

Annuities boom follows rise in qualifying age for drawing on retirement savings, reports Neasa MacErlean

Over the next few months a boom is expected in the number of people taking their pensions early as they rush to beat a change in the minimum age. Next April, the age at which you can draw on a private pension will rise from 50 to 55, which is likely to prompt many people to try to beat the deadline.

"We've had quite a few asking about it," says Laith Khalaf, pensions analyst at the independent financial adviser Hargreaves Lansdown.

While Legal & General usually sells about 13% of its annuities to under-55s, this year that proportion has grown to 16%, and could rise further if this age group decides to take the plunge before the deadline.

Many pensions savers aged between 50 and 55 who are unaware of the rule change could miss out. According to research last week from the risk and benefits management firm Aon Consulting, only a quarter of UK workers are aware of the new rule.

Drawing a pension so early, however, would be impractical for many. "For most people it is not affordable to start drawing a pension in your fifties," says Khalaf, though the argument for early retirement can be powerful.

"If the amounts are acceptable, there is a good argument for starting [to draw it] sooner rather than later," says Edinburgh-based actuary Ronnie Sloan. There's a widespread assumption annuity rates for fiftysomethings are not great - in fact, they are relatively good. A 50-year-old single woman who doesn't smoke, with £100,000 to spend on an annuity, would get £451 a month on the best flat-rate annuity (from Aegon Scottish Equitable) flagged up on the Financial Services Authority's comparison tables (www.fsa.gov.uk). She would have to live to 69 to get her £100,000 back.

If her 55-year-old sister started a similar annuity, she would get £474 a month, and would have to live to 72 to recover her £100,000. Their 70-year-old sister would get the higher monthly sum of £630 but would have to draw it to the age of 83 to break even.

The attraction of the youngest sister's option is that 25% of a pension fund can usually be taken as a tax-free lump sum. Some people will use that to pay off their mortgage or invest in their business and then try to save as much of the annuity income as possible.

Deciding on the type of annuity is difficult - while 90% of people opt for flat-rate annuities, Stuart Bayliss of Annuity Direct thinks that more people should consider escalating, or inflation-linked annuities. "Inflation is going to come back in a year or two and, potentially, with a bit of a vengeance," he says.

If the youngest sister opted for an RPI-linked annuity now, she would start on £212 a year, according to the FSA tables. Even if she opted for a 3% escalator, she would only start on £274.

For those not wanting to take an annuity, there is also the option of a drawdown pension - allowing you to postpone taking an annuity, keep the bulk of your pension invested but take up to 25% of your fund as tax-free cash. Some providers set minimum sums on drawdowns and with-profits annuities.

People taking these decisions may feel they are gambling with their future. They'd be right: they are being forced to guess what will happen on investment returns, inflation, general mortality rates and their own life expectancy. But some may feel it is worth the risk.

Final salary pensions at risk with up to a million people likely to switch to defined contribution schemes

Half of Britain's companies still running defined benefit pension schemes plan to close them to all members by 2012, according to a survey released by consultants Watson Wyatt today.

That would mean a million people currently saving for their retirement through defined benefit schemes, including final salary pensions, will have to switch to defined contribution schemes, shifting the investment risk onto the employee and making them less reliable.

Three-quarters of companies with defined benefit schemes have shut them to new staff, but only 9% have so far closed them to existing ones, the report, based on interviews with 250 of Britain's largest companies, said.

But the group found 50% of firms expect to have shut the schemes to all of their workers by 2012.

Rash Bhabra, head of corporate consulting at Watson Wyatt, said: "More and more employers are taking a long, hard look at the risks they run through their pension schemes and saying 'enough is enough'. Companies who were delaying a decision on closing their schemes to existing members until others had stuck their heads above the parapet are now ready to act. There is a sense of inevitability that what was once seen as the nuclear option is starting to become the norm."

A further 28% of companies expect to keep their defined benefit scheme open to existing members, but on less generous terms. Only one in four companies with schemes that remain open to future accruals do not expect to make any changes between now and 2012, but this figure includes 16% of firms who have recently introduced measures to make their schemes less generous.

There has been an increasing trend in recent years for companies to close their defined benefit pension schemes to new members and replace them with less generous defined contribution schemes.

Under final salary schemes, the employer states how much a pension will be worth on retirement, based on the number of years a worker has belonged to the scheme and their salary immediately before they retire.

But under defined contribution schemes, companies only guarantee how much they will contribute to the pension each month, leaving the individual to shoulder the risk of stock market volatility and increased life expectancy.

Bhabra said: "When employers are cutting jobs and freezing pay, pension arrangements will inevitably be put under the microscope. At the same time, companies are confronting much bigger deficits.

"The more they have to pay to shore up pension promises made in the past, the less money there is to pay for new pension promises going forward."

Why wasn't I warned about problems with my Sipp investment?

I have used the £325,100 in my self-invested personal pension (Sipp) to buy a commercial property. These retail premises are held within the pension scheme, which is looked after by James Hay, part of the Abbey and Santander group. The premises are now vacant and attempts to re-let have so far been unsuccessful, which means I am responsible for paying the business rates – more than £8,000 between now and next March.

I can afford to pay this out of my other savings but James Hay says I must pay out of the Sipp. As there is no cash left in that, James Hay asked me to transfer in enough to pay the rates.

I have now discovered that James Hay was wrong and I cannot add more money to my pension. I took the maximum tax-free cash sum making the fund "crystallised" and am not allowed to make any new pension contributions.

As I had to meet the council's deadline, I have paid £925 by debit card and set up a monthly standing order for the remainder, but James Hay says there will be repercussions for doing this.

Apparently, I cannot pay the rates myself – nor can I give James Hay the money to do so, but it says if there is insufficient money in the pension to meet bills it will sell the property at auction.

If I had been warned of this approaching problem, I could have left a couple of quarter's rent in the Sipp, but James Hay says it is up to me to make sure I am familiar with issues such as crystallisation. CG, Nutfield, Surrey

It is the pension fund's responsibility, not yours personally, to pay the business rates. By paying the rates yourself, you have made an illegal loan to the pension fund which it must repay. But it can't because it has no cash. And so you keep going round in circles.

On top of the rates, you will have to pay an insurance premium in October, James Hay's administration costs, fees for installing a new tenant and any maintenance costs that arise. If the Sipp cannot pay the bills, James Hay will sell the property for what it can get.

It has worked out two escape routes, neither of them attractive. You can become the tenant yourself and pay £25,000 a year rent, out of taxed income, to put cash into the fund. Or you can set up, and pay for, a second Sipp to take over the existing property. James Hay is unclear whether you could transfer the property over or would have to buy it but you will pay £1,250 to the solicitor and £550 to James Hay for administering the transfer, plus VAT. James Hay has offered to abolish the set-up fee for a new Sipp and to reduce the annual fee to £200, although all other fees will remain the same. This is your extremely difficult decision.

James Hay is not authorised to give advice, although that would not prevent the company alerting you to the danger of having no cash in your pension. I doubt the firm was any more clued up about the consequences than you were, nor the adviser who recommended this scheme in the first place. When you get to 75 in seven years' time, you will have to sell the property anyway to buy an annuity.

• Email Margaret Dibben at your.problems@observer.co.uk or write to Margaret Dibben, Your Problems, The Observer, Kings Place, 90 York Way, London N1 9GU and include a telephone number. Do not enclose SAEs or original documents. Letters are selected for publication and we cannot give personal replies. The newspaper accepts no legal responsibility for advice.

The following correction was printed in the Observer's For the record column, Sunday 9 August 2009

In the article below we referred to Ronnie Bowie as "president of the Institute of Actuaries". He is actually president of the Faculty of Actuaries. The president of the institute is Nigel Masters.

Workers with generous final salary pensions must give up at least 10% of their benefits if Britain is to avoid sleepwalking into a two-tier pension scheme with growing numbers of people living in poverty in old age, the president of the institute of actuaries said yesterday.

According to Ronnie Bowie, one of the pension industry's most senior experts, there needs to be a shift in thinking about pensions, away from short-term cost savings to a broader review of the support offered by employers to all staff.

At the moment, employers are devoting most of their time and effort to protecting the benefits built up by workers in final-salary schemes. Britain's biggest employers have pumped billions into the schemes. Bowie said that despite these efforts, schemes continued to run huge deficits, which were expected to get worse over the next 20 years.

The effect of propping up final-salary schemes in the private and public sectors, generally paying two-thirds of a worker's last pay cheque as a retirement income, was to deny younger workers and people outside such schemes a decent pension. "If we could wind back the clock, it would be better if all these schemes could be based on career average earnings and not final salary. Career average schemes have little effect on the incomes of the low paid and offer a fairer reward. They would also be more affordable for employers to run. But that didn't happen."

Tory shadow pensions spokeswoman Theresa May has signalled that an incoming Conservative government would encourage hybrid schemes that share the costs of increases in life expectancy or falls in investment returns between employers and staff. The government refused to allow reforms to occupational schemes, giving them greater flexibility, to be included in last year's pension act.

Bowie said that while reforms affecting future pension contributions would be helpful, the crunch for occupational schemes would arrive in 2030 when all of the baby-boomer generation was in retirement. "If companies could share inflation-proofing on benefits, that would allow around 30% of costs to be shared," he said. "That would reduce the risk costs would soar, but it is not the same as reducing costs to more manageable levels."

While a spate of scheme closures means that fewer than 2.5m workers currently pay into final-salary schemes, more than 18m workers rely on at least some guaranteed pension to form part of their retirement income.

Employees' accrued rights are protected under UK law, dating back to a 1993 pensions act, according to pension lawyer Robin Ellison.

He said the government would need to overturn that act, but even then rights would most likely be protected under human rights legislation.

Bowie said: "I think there is a degree of inevitability about this because I'm not sure there is anything the government can do now. It is unlikely people with these benefits will give them up, but without it companies will need to put more and more vital funds into these schemes and workers outside the schemes will suffer."

Strike threat over bank's plan to shut final salary scheme and require staff to make contributions of 3% of salary

Barclays today pledged to pump £500m into its pension fund in an attempt to head off threatened strike action by employees who were furious about the proposed closure of the bank's final salary scheme.

On the last day of a two-month consultation, John Varley, Barclays' chief executive, also offered to defer the implementation of the proposed change by four months to the end of April.

Barclays' plan to shut the final salary scheme and transfer staff to an alternative, less lucrative, pension scheme, into which they would have to make contributions, has led to a backlash. The bank announced the concessions at a shareholder meeting on Thursday after rowdy protests from union members outside the hall.

The original proposed changes to the scheme would have required staff to make contributions worth 3% of their salary. Varley is now telling staff they need not make contributions until 2011 and then only at 1% a year. The full 3% would not need to be paid until April 2013.

Officials from Unite, who led the protests on Thursday, said that the concessions might not be enough to quell the anger. "I'm by no means clear that it does go far enough," said Andrew Case, national secretary of Unite. "We are still at a stage where we are considering the implications. We are asking our members for feedback."

The union is preparing to ballot members on industrial action. It had hoped to preserve some elements of the final salary scheme.

Barclays has a £3.5bn deficit in its pension fund, and the £500m the bank is now planning to inject is an increase on the £336m put in last year.

Varley, who this week unveiled a rise in the bank's first-half profits to £3bn, defended the decision to make the pension changes in a letter to staff.

"It would have been easier to have left this to another generation of leaders. But it was clear to me that it would be wrong to do so," he said. "I know that I have asked a lot, but … I am encouraged that a significant number of you have said that you understand why we need to find a long-term, sustainable solution to the potential consequences for Barclays of the maintenance of today's pension arrangements."

At the shareholder meeting, he had faced calls for the bank's profits, or even directors' bonuses, to be used to plug the gap in the scheme.

The bank said its latest "enhancements" were intended to address concerns raised by staff during the consultation period: "The concerns which prompted most feedback related to timing, the financial impact of the changes and long-term financial planning."