Saturday, March 13, 2010

Ticking time-bomb - the pension void

As we approach the general election, our local secondary school has organised a Question Time involving the constituency candidates. The school asked parents and pupils to submit questions, so I have suggested:

The under-funding of pensions has been described as ticking time-bomb. What proposals do you have to ensure the children leaving this school can retire at a reasonable age and free from poverty?

I am not hopeful. Pensions are hardly a popular subject, so it is likely the question will be shelved. And if not, any credible proposals will require prudence on a scale that modern politician simply can't contemplate.

And yet pensions are hugely important. They rank along with the health service and improved education as the greatest enhancement to the quality of life since the War. We are in grave danger of destroying that legacy, and largely because we are not prepared to face reality and take the necessary measures.

Indeed, pensions are the classic example of the modern politician's dilemma. The few who understand about pensions know it is an immense problem; they recognise we need to take action quickly; and they acknowledge the remedies will be unpopular. But here's the crunch - they also know the benefits won't come until they are long gone from office.

And so they ring their hands, whilst a generation of young people look forward to... well what?

In only twenty years we have witnessed the virtual destruction of the Company pension scheme; we have a grossly inequitable and unsustainable public sector liability; we have removed tax breaks for pension funds (technical but hugely important); and we have introduced a range of putative reforms that (with one notable exception) make matters worse.

Let me come clean here. I am a trustee of a very large pension fund - it has assets of over a billion pounds. For many of the scheme's members their share of the fund is their greatest asset. So I suppose I know a bit about pensions; and I am constantly reminded of how significant even relatively modest pensions can be to those reaching retirement. So why can't we sustain this?

The problems are many fold. We are living longer; there are more people reaching retirement; our funding is inadequate; the cost of housing discourages people from starting a pension; we don't trust the government; companies want to 'get the hell out' as quickly as possible; people don't understand how pensions work... I could go on.

But there is one significant factor to add. We have an absence of vision and political will to tackle the problem. It is negligence bordering on the shameful.

Okay, so I've defined the problem, but what are my solutions? I will come to those, but to before I do, I should be fair to the Government in one regard. The Pension Protection Fund (PPF) is good idea.

In a nutshell, the PPF steps in when a Company goes bankrupt and hasn't the assets to pay its pensioners in future. It provides protection up to about £30,000, which covers the vast majority of people - and it works like an insurance scheme, so it shouldn't be a drain on tax payers. It isn't perfect, but it's an example of using creative thinking to find an affordable solution.

What more do we need to do? The answer is lots - and here are my suggestions to fill the void.

VISION. We desperately need a vision for the pension system that people can understand and buy into. My vision is simple: young people starting work today should be able to fund a retirement pension of about half their salary. And we need a system which makes this possible for everyone - not just those who work for big companies or the public sector.

COMPULSORY SAVING. Pensions are one of the few areas (along with education ) where I think the State should make us do what is in our long term interest. Compulsory saving will not be popular, but it is necessary. It is also fair that everyone should make some contribution rather than rely on benefits.

As usual the Government has fudged it. From 2012 people will have to 'opt out' of pension schemes, but the rates they suggest are too low and will probably encourage companies to reduce their contributions. The system they propose is also inflexible.

GUARANTEED RETURNS. If we are going to compel people to save, we should give some guarantee of the return. With modern pensions you build up a 'pot' of money; when you come to retire you use that 'pot' to buy what is called an annuity. But the rates vary and they are very poor - typically you need £25,000 to buy a pension of £1000 a year.

I would like to see the introduction of a guaranteed annuity rate. It isn't beyond the skill of man to devise an affordable scheme which would offer people a fair rate for the first £10,000 of their pension - thereafter it could be left to the market.

Even better, would be 'pension bond' which payed an index linked return - and the capital returned to the person's estate (suitably taxed) on their death. I believe, more than any other measure, this would encourage people to buy into pensions

PUBLIC SECTOR REFORM. The inequity between public and private sector schemes is a gross injustice - and more importantly, it holds back pension reform. To be fair it has started, but not enough has been done.

All Public Sector schemes should be closed to further accrual - this means that the benefits people have 'earned' so far would be protected, but going forward they would have to join the same schemes that the vast majority of the public participate in.

And before anyone in the public sector cries foul, this is precisely what is happening to almost every company pension scheme - the sector that earns the wealth to fund our public services in the first place.

Frankly, we have no 'fund' to pay public sector pensions. If these pension were in the private sector they would be have to be bailed out by the PPF. In my view, there is a very strong case that the same rules should apply and pensions capped at £30,000. But are politicians ever going to do that? I doubt it; turkeys don't vote for Christmas!

SAFETY NET. To be fair, we do have a safety net in the state pension. But I would like to see an additional one - a guarantee that people's retirement savings will not be means tested to the point they become irrelevant, particularly for those on modest pensions.

That is enough for now.

My suggestions are probably not right, but at least they are an attempt to start a debate. None of them would be cost free - but we make choices and I don't believe any of them are beyond the means of what is still one of the world's largest economies. As we stand now, a generation of people are facing a very grim future.

Unless we act quickly, we will - in a very real sense - live to regret it.


  1. Eeek - That made scary reading!! I'm one of those people that don't know much about pensions but I am aware how important they are.

    C x

  2. Carol

    Pensions are very scary! They are also way too complex - and, in a way, you are great example of that. You are doing a masters degree right? And you don't know much about them. The truth is, hardly anyone does anymore. Imagine how little the frontline workers in factories and offices understand ... nightmare!

  3. Mark, thank you for this post. We are both pensioned and can compare the performance of savings we have handled ourselves and funds into which we have entered and from the proceeds of which we have been obliged to purchase annuities.
    Bluntly, the managed funds and the annuities have been less than good returns on our money.

    I worry too, when talking to friends' children, let alone grandchildren, that they have no idea of what is going to happen to them if the bomb goes off in their lifetime.
    Quite rightly, they regard the current situation as a rip off but they seem to have no will whatsoever to make private provision.

    I like your idea of pension bonds. I would have bought into that early on in my working life.

    I have never objected to taxation as making provision for people not in a position to save for their pensions, but I do worry about the overhanging cliff of people on benefit because it was more important to fiddle the statistics than to find them work and the level of taxation that will be needed to fund their pensions to a reasonable level.

    As to public serviice pensions, I can remember when local government and the lower levels of the civil service were not well paid and the security of the pension was oneof the elements in holding down wages in that sector.

    Looking at job advertisements, it is clear that that situation no longer prevails and public service pensions need to follow private practice.

    Pensions are not glamorous, but we need a debate to make it clear to people that money spent on the hairdresser would be better used put aside for when the hair is getting a bit sparser.

  4. I honestly wish I was more au fait with the whole pensions thing. I suspect like a lot of people I don't know nearly enough for my own benefit (no pun intended).

  5. I agree, pensions are a quagmire.

    When they were introduced, life expectancy, post pensionable age, was a few years at best (and hugely inequitable between men and women since women retire earlier and live longer) And at the time, when you retired you were, being only a few years from death "past it". Now people can reasonably expect to live for decades beyond retirement.

    Demographics are adding to the problem with a growing aging population having to be supported by fewer and fewer working people.

    The old system whereby retired people are supported by working people is not sustainable under this pressure. We need to move to a system whereby retired people have funded their own pensions during their working lives.

    I rather think that you are right: the solution lies in the combination of enforced saving plus a safety net. I actually think that this is what the government is moving towards.

    I would add that a greater flexibility in employment expectations as one ages is an important requirement too. Why suddenly stop working completely at some predetermined age? A flexible, reduced-time working week with a commensurate drop in salary, topped up by an increasing amount from the pension (as one works less and less) could perhaps offer a way forward.

  6. We do! But there is a practical concern, that is, persuading the current generation of workers that they must not only fund their own pensions, but also pay for those current and short-term future pensioners who have not been required to fund their own.

  7. A good and valid point Mark, but sadly never going to change things for my age group. A few years from now and I will be digging up that auld biscuit tin buried in a safe place away fae the tax man and the Queen of England's government.

    Old dogs... new tricks, say no more pal.

  8. All very very worrying, especially if there are changes to inheritance tax.

    Politicians never ever seem to take the long view though, its not in their best interests.

    Working in local government has made me very cynical and I am finding it incredibly hard to decide which party to vote for this time.

  9. Our social security system had, for decades, a surplus in the trillions. The government took the money and gave the trust fund IOUs. Now they want to cash in some of the IOUs but the government doesn't have the money. Seems like you are in something of a similar situation.

  10. This is the sort of subject that is so scary to sit and think about properly that most of us not in the know just choose to shelve it to the back - thinking that we've got years before we have to worry.

    In France paying for your pension is compulsory, but all the different industries retire at a different age and at a different rate of recoup, It is such an involved subject. We've not been paying into the system here for long enough for it really to make a difference to my life. Mr FF is much younger than me and will have years to pay for his old age.Let's hope he sees the benefits.

  11. Welcome back - I hope your time away from blogging was as productive as you anticipated.

    A most thought provoking post and a situation that everyone should be concerned about. In spite of working in the finance industry (and providing business analyst support for our pensions software!) previously I still don't know enough about pensions to add to the debate. However, I was shocked to find in my last employement (a bank) that only two thirds of the employees had joined the company pension scheme or had made arrangements to fund their own. If people working in the finance sector aren't buying a stake in their future retirement needs then I dread to think how low the figure might be elsewhere.

    One factor is that young people simply don't think a pension is that relevant. They'll move around companies quite a bit and its just too far in the future. Paying off university fees and trying to get on the housing ladder are much more pressing needs. I agree with you: some form of compulsory saving is probably the way forward out of this mess.

    You left a comment about 3-column blogs over at mine. With the new Blogger in Draft templates, the 3-column option is there with all kinds of flexibility re how you want to arrange your sidebars, column width etc. Unlike me when I did it originally, you won't have to fiddle around with HTML at all. I look forward to seeing the results of your efforts shortly :)