The Pensions Commission report - Pensions: challenges and choices
Well, the Pensions Commission led by Adair Turner finally published its interim report this morning and guess what? Our pension system is in dire need of reform, that’s what. Hmmm! Call me Mister Picky, but isn’t that exactly what nearly everyone has been telling the Government for the last seven years throughout the seemingly endless consultation on pensions we’ve had to endure? The trouble is further change is years away and all this is happening while the acres of legislation going through in this year’s Finance and Pensions Acts are set to tie employers, advisers and the pensions providers up in knots for years to come while we implement it all and effectively rebuild our existing pension schemes to a new post A-Day design. I know it’s a hackneyed phrase and all, but the thing that really does come to mind while I’m sitting here reading and writing this stuff is that we really are being required to rearrange the deckchairs on the Titanic while everyone except the guys on the bridge can see we’re just about to hit a thumping great lump of ice about the size of the Isle of Wight.
Today’s report is full of data (well over 500 pages) outlining the scale of the problem facing us in the future, but does not make any recommendations as to action. Those will come in a year or so’s time, after the next General Election, and probably just before A-Day. In the meantime we are effectively going into yet another period of consultation on pensions to see if a consensus can be reached on the best way forward. Realistically, though, any concrete changes coming as a result of the Pensions Commission’s work are a long way away and apart from worrying the hell out of everybody in the meantime this report is just another , hopefully final, wake-up call for the Government to do something to get pensions spreading again in the UK.
The maths behind the pension problem quite clearly look to be a worrying aspect. In 1950, a man aged 65 had a life expectancy of a further 12 years. Now, things have improved age-expectancy-wise since then and the tricky job facing the actuaries (the guys who had the knack for maths at school then went on to make a career of it) has been to double guess how far the improvements have been going from time to time. In 1981 their best shot was that a 65 year-old man in 2004 would probably pop his clogs, on average, 14.8 years later. Many pensions decisions regarding the funding of State and private pension schemes were based on this ‘fact’. Unfortunately it was bit out and actuaries today, in 2004, think that 19 years of extra time after 65 is probably a bit more like it. But things continue to improve and the current assumption is that by 2030 an average 65 year old man will be able to look forward to an extra 21, or even 24, years before leaving the planet. The fact is, no-one really knows about future trends, but we do know that the past guesses were out by a significant factor. Enough to have given us a funding headache for private and State pensions.
The Commission suggests that at least 9 million are not making enough provision for an adequate income in retirement. They stop short of quantifying the “savings gap” which is probably a good thing as I don’t think that it really helps anybody understand what’s actually going on. What it really means is that a significant proportion of the current UK workforce is going to end up in a fair bit of bother in retirement if we don’t watch out and that one way of avoiding that would be to throw a load of money at the problem. But the report points out that this isn’t the only alternative and that working longer would do the trick just as well. In fact the variables are fairly easy to get your head around and really don’t need two years of thought to come up with. Either we save more, work longer or get lucky on the stock market, or we’ll just have to put up with low pensions to support us as we progressively live for longer and longer after retirement. You could add to that list that it would also be handy if the pension savings we do manage to put aside weren’t taxed by our Government, but I don’t think there’s much chance of that happening other than in our dreams.
The Commission thinks that the present voluntary system and State system that we have is unlikely to solve the problems that we face in the UK. So to start the debate they identify 3 possible ways forward
- Revitalising the voluntary system
- Changing the State pension system
- Adding more compulsion to the level we already have in the UK.
The Report does not come up with any recommendations about what the right solution is and it is all a matter for debate and discussion in the coming weeks and months. This will all be covered in future BeeLines.
But as I said earlier all of this, although necessary, will take time and it makes me wonder whether anything can be done now to help alleviate the position we find ourselves in.
The fact that existing pension schemes are more likely to be closed than new pension schemes opened by employers seems to me to be a central issue. The pension crisis has surely been made worse by the fact that the recently introduced Pension Credit system brings ever more people into the net of means-tested benefits in retirement. Widespread means-testing for the old acts as a disincentive to saving for the young. Outside of Government circles, at least, I don’t meet with anybody who disagrees with that.
I was pretty interested, therefore, to read in this morning’s Guardian that the current Pensions Minister, Malcolm Wicks, is reported to have said that the Pension Credit is “only a policy for the short and medium term” Blimey! I had to read that at least twice before I could believe it. This is the most significant thing I have seen in all of the press coverage and speculation about pensions that has been generated by the publishing of this interim report. If the Government could bring itself to say definitively that today’s means-tested benefits for pensioners just won’t be there when young people in the workforce get to retirement we would have something of a breakthrough that could get us out of the current distribution impasse. For a start, employers and pension advisers would be able to recommend that employees join the hundreds of thousands of empty stakeholder pension schemes that now litter our pensions landscape. In giving such advice no-one would be laying themselves open to accusations of giving inappropriate advice to people by recommending unsuitable pension savings. The unsuitability of pensions for millions in the workforce today, caused by the Pension Credit system, is what is acting as a real brake on any meaningful spread of pensions in the UK as the results of last month’s BeeHive poll demonstrated so well. Perhaps we should be calling on Government now to make some kind of announcement that the Pension Credit will not be around for long and then, just maybe, we can all get on with the job of getting people to join the pension schemes that are already sitting there empty and waiting for them while in the longer run we identify the right solution to the wider issues that we face as we live ever longer.
12 October 2004
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