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Join the pensions debate - can you afford not to?Pensions has become one of the hottest political topics of the last five years with acres of media coverage and endless debate on how the UK can solve the so-called pensions crisis. The Government has commissioned a number of reports on this vexed issue. However, with the prospect of finding a solution appearing as remote as ever, clearly hard choices have to be made. The population is getting older, the savings' pot is getting smaller, and people are living longer. It's an issue which isn't going to go away. On these pages we look at the current developments and urge members to get involved in the debate. In October the Pensions Commission, made up of experts from business, unions, and academia, published its first report. Its remit was: "to assess trends in occupational and private and long term saving, and to advise whether there is a case for moving beyond the current voluntarist approach." The report set out four policy options for future pensions:
The ChallengeThe UK pensions challenge is the combination of longer life expectancy, and the falling birth rate, which will produce a near doubling in the percentage of the population over 65 years of age between now and 2050.Life expectancy beyond age 65 for men has increased from 12 years in the 1950s to 19 years now. These recent trends make problems worse not better.
State PensionThe report shows that the current UK state pension system is among the least generous in the developed world. Including fully paid up State Second Pension and SERPs, the average UK earner would only receive 37 per cent of their working life earnings in retirement, compared to about 70 per cent in other European countries.It is planned for the state scheme to become even less generous in order to constrain public spending in the face of a rising number of pensioners.
Company contributionsVery large increases in the stock markets from 1974 to 2000, which averaged 13 per cent a year returns, compared to the very long term historic 5.5 per cent annual returns, created a fool's paradise with too little put into pensions.So whereas in the 1970s a 1/60th final salary scheme with a retirement age of 65 was estimated to cost 10-14 per cent of salary, it would now cost 22-26 per cent. The trend in employers' pension contributions has been downwards since the early 1980s and recent increases have only been to plug shortfalls. The report is clear that the decline in employers' commitment to pensions will have a major impact on pensions savings.
Retirement AgeThankfully the Pensions Commission rejects the idea that pensioners should become poorer, relative to the rest of society, in future. However they do propose a rise in the average age of retirement.The current average age of retirement for men is estimated to be 63.8 and 61.6 for women. Healthy ageing should help, but it would have to increase to 69.8 for men and 67.4 for women by 2050 for the overall cost of pensions not to rise, which would mean millions of people working well into their 70s. Given the significant differences in life expectancy and health across society, increasing the pension age to 70 would hit the poor hardest.
Increasing compulsionThe closure of good final salary schemes has increased the numbers of people in work not saving adequately for retirement to around nine million. The TUC has argued for compulsory employer pension contributions.The Commission says: "Unless new government initiatives can make a major difference to behaviours, it is unlikely the present voluntary private saving system, combined with the present state system, will solve the problem of inadequate saving."
Voluntary savingThere are big barriers to the success of a voluntary system. The cost of advice and administration can significantly reduce the returns on savings, particularly for low earners. Charges can absorb 20-30 per cent of an individual's savings.This poses the question: Can a voluntary market for pensions work for low-income customers? The move to money purchase schemes has shifted the risk to individuals rather than to employers, the state or the financial services industry. In addition the complexity of the UK pension system, both state and private, causes confusion. Means testing in the state system reduces the incentives to save.
Women and pensionsThe report acknowledges that women pensioners in the UK are significantly poorer than men. Sixty nine percent of women aged between 65-69 who receive the basic state pension receive less than the full amount, compared with only 15 per cent of men.An effective future pension system must be one in which the vast majority of women get pension entitlements in their own right.
ConclusionsThe report is long and full of facts. It highlights three possible ways forward:
Next Steps: ConsultationThe commission outlines a number of issues to consult on, including:
Usdaw will be submitting its response in the next few weeks. If you have any particular views you wish to be included, please write to the Pensions section at Central Office, or e-mail: pensions@usdaw.org.uk
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