Friday, February 8, 2013

The trouble with pensions - part 1

A couple of posts previous to this, Mark in Mayenne commented that he could weep for what has happened to education in Britain. I'm not so sure, but I could certainly weep for what's happened to our pension system. In a little under twenty years we've destroyed (or at least allowed to die) one the most tangible aspects of social progress since the creation of the Welfare State - the prospect of a decent and secure retirement.

The reasons for this are largely the preserve of experts. Of the general population, even the well educated and financially savvy don't understand pensions; most folks are simply bemused, confused and mistrusting.  Younger people have all but given up hope - they'll 'work till they drop they' say, in a tone that's half humour and half resentment.

I don't blame them.

Successive Governments have made the system so complex it is now way beyond the layman. The recent announcement of a 'new simplified state pension' is a classic example of political spin sneaking through a measure through which ought to have caused an outcry.  In case you didn't know, it's effect for the vast majority will be they work longer, receive less and have fewer means to provide a cushion should they wish to save for it. 

It's true that pensions are a complex business - and there's no single reason for the demise of the UK system. We have an ageing population; successive governments (and New Labour in particular) have made some stupendously bad decisions on the tax treatment of pension funds; politicians have run scared of tough decisions for fear of electoral backlash...  I could go on.

But instead I want to give you a slightly different perspective. It comes from years of being a trustee of two very large funds, and many more spent caring about and planning for retirement. I am, perhaps sadly, one of the few who (broadly) understands pensions; who takes a very close interest in how they are structured, how policy affects them, and how in turn it will impact future generations.

I'm going to offer you three very different reasons for their demise.

The first is you and me.  I don't mean that literally, but if the changes in pension provision have shown one thing, it is that if you require people to take personal responsibility, huge numbers will choose to spend today rather than save for tomorrow.

To some extent this is a result of confusion and mistrust - the reason so many people joined the old company salary schemes is that they were very simple to understand - but it is also because our culture and attitude has changed; I'd argue for the worse.

I've long ago lost count of the number of middle earning people who tell me they can't afford to save for a personal pension. The operative phrase here is 'middle earning'. There has always been a section of society that struggles to afford a private pension, but middle earners (austerity aside) are rarely in that bracket. Of course, I understand they don't use the phrase 'afford' in an absolute sense, but as a general population we continue to make active choices to spend on houses, cars holidays, whatever...  rather than save for retirement.

And it's important to recognise that we've been under-saving for twenty years - not just in times of austerity; indeed, the supposed boom saw some of the biggest reductions in pension provision. In part, this was because of a widely adopted mantra that 'my house will be my pension' - but it was also, frankly, because attitudes to saving for retirement changed.

As a whole, you'll pick up that I regard the demise of pensions as a national disgrace - but at the risk of some controversy, if there is one section of society I will have little sympathy for in years to come, it is those who clearly have the means to save but demonstrably choose not to.

The second is public sector pensions, or rather the failure of consecutive governments to tackle the issue. It might seem counter to my position to say that public sector pensions are unsustainable  - I'd go so far as to say they are verging on the immoral - but in fact I believe they are central to the lack of progress in the private sector.

As a rule, I don't like conspiracy theories, but my deeply held belief is that one of the chief reasons the private sector system has been allowed to die, is that those in power have not been affected. Public sector pensions are such a huge issue that I plan to discuss them separately in a follow up post (can you wait) - but for now I would just register that until we are all in the same boat, there will not be the political drive and thought leadership necessary for our rescue.

Which brings me neatly to the third reason - that there is no political vision for retirement.  The policy makers have come to see pensions entirely in terms of cost and risk and future debt projections; they run scared from the figures and even more so from the electorate.  No politician wants to lose votes for a decision that will bring benefit after they've gone - and this is perhaps the biggest trouble of all.

But if ever there were a case for re-framing a debate, this is surely it. I happen to be passionate about pensions, but it's not the financial instruments I care about; it is ensuring I and my family - and millions of others like us - have a secure and fulfilling retirement.

Everyone understands the days of pay-offs and feet-up in your fifties have all but gone - but that doesn't mean we can't still have an ambitious political vision which, for example: recognises that winding down from full-time employment is going to be necessary for millions; incentivises companies to offer more than minimum pension contributions; legislates for more flexible and age appropriate employment contracts for workers who've given years of service; acknowledges a better balance between the private and public sector would be a social good.

I could easily add to that list - and perhaps I should.  But the tragedy is that our politicians do not do it for me. Most don't understand, many don't much care, some are willfully blind. It is an absolute tragedy and a one we all will pay for.

As I said at the start, I really could weep.


  1. Hi Mark,

    The idea of retirement with a pension is relatively new. It was introduced only for people over 70 and was means-tested (in 1908) and was updated in 1946 with the introduction of National Insurance.

    At this time, the length of retirement that one could expect to enjoy was only a few years, average age at death being only a little over 65 (for men). Before these times, one worked until one dropped.

    Life expectancy has increased since then, and with it, peoples' expectations of retirement. Expectations are now way beyond the initial idea of a state pension.

    I think that it is naïve to believe that one can live comfortably off a retirement income for 20 years or more without having made strenuous efforts to provide for it onesself.

    I'm not sure that it is (or that it should be) the taxpayers' responsibility to pay for it.

    I think that we might have to move to a system whereby one is entitled to a state pension some fixed period (say 5 years) before expected death, and anyone wanting to retire earlier than this will need to fund it themselves.

    I understand that the inflation-proof civil service pensions, if realistically costed, would treble Britain's current national debt (approximately). I have no idea how they think this is going to be funded. "Verging on the immoral", is in my view an understatement.

    1. I agree with almost all of this Mark - it cannot be the States responsibility to pay for retirement on this scale. But it is the State's responsibility to put in place the mechanisms that allow and encourage people to save for a decent retirement - we would all benefit from this - but the politicians are singularly failing to do so. The recent auto enrolment scheme ( phasing in from this March) is a start towards compulsory provision but it is typically complex, far too limited and largely designed to offset means testing of benefits in the future.

      I believe that with the political will it is still possible for us to achieve a decent retirement income for the majority of people from say their early sixties. To put a VERY rough figure on it, that would means saving circa 15% - 20% of our incomes throughout a working life - tough, but not impossible with a combination of company contributions, tax incentives and (crucially) an early start. It means saving twice as much as we do!

      We must also rebalance public and private sector provision - partly to help fund the difference, but also because we cannot have this divide where the State supports a system that is in another league to that which is realistic in the private sector - which ultimately pays for the State in the first place.

      I also agree about an increasingly elderly population that will need to work - which is I why I advocate we start thinking about how to mange that now. To give a tangible example, I'd like to see workers over sixty having the contractual right to reduced hours (should they chose) , tapering down to half-hours at , say, age seventy. This would give folk the prospect of maintaining their career incomes (rather than working part time at B&Q) but still enjoying more free time that we associate with a decent retirement. Again - absolutely not impossible to do - it just takes vision and will.

    2. I agree with the idea of more encouragement to save. I suspect that the mere existence of a state pension (that was once adequate) was enough to deter people from saving for retirement.

      I'm not sure I think that there's any magic to a pension plan though. It's just a specific example of a tax-reduced saving scheme; ISAs are another. The difference of course is that with a pension plan, one is prohibited from spending one's savings "too quickly", whatever the government of the day takes that to mean. Special penalties apply in relation to inheritance of a pension fund too, so I don't think I would recommend one to a young person today.

      I very much like the idea of phased-in, part-time working for older people (that would be me). It has huge advantages, and I know of people doing exactly that now. The difference between even 5 days on+2 days off, and 4 days on+3 days off is enormous in terms of fatigue and leisure time.

      I'm not sure that my career job would have supported part-time working. But I am happy to have traded it for my current lifestyle. And I can see myself teaching English part-time at some point in the future, when running this place takes more energy than I have available.

  2. I'll be interested to see your views on public sector pensions..particularly those appertaining to those at the top of the public sector tree.

    I times of financial woe, the U.K. newspapers stuffed with articles on expensive holidays and over priced restaurants.
    Is this just the power of advertising firms or is it an example of live for now and get someone else to pay later....

    Bu the worst disincentive to saving is the idea that you have to have your money managed for total incompetents skimming off management fees!

  3. I would just like to point out that there is no such thing a a public sector pension. They are different. The civil service is funded until recently by government alone and was non contributory, with more generous terms than any other public pension. Local government is self financing with the local authority putting in an employers contribution. The employees put in 6.5%.

    Local government pension funds are also solvent, they have funds to pay the pensions they are due to pay. So much of what is on the news is just wrong.

    1. Yes they are different in their funding structure, and they are far from being all bad (await my next post) - but their aim and outcome is the same as any other pension: the payment of a secure income for retirement. In a perfect world, I wish we could have a comparable outcome for the private sector but that is not realistic - meanwhile it remains my view that because the public sector has been 'ring fenced' from the worst of the changes this has held back more radical thinking and action for the majority of the population who really are facing a very dire situation.

      Local authorities are funded but sadly most are in huge deficit by the standards required for pension trusts - they are solvent to the extent that payements will not stop, but they do not have sufficient funds to repay the projected liabilities without top up contributions (this is much the same as most private sector schemes)

      As I said, pensions are a VERY complex business.

  4. I'm ashamed to say that I have as yet no real provision for my retirement - I just cannot afford it; every is allocated and attributed before I get it. And though I want to remedy it as soon as I can the remedies do not seem to inspire me with any confidence.

    1. I have sympathy with your lack of confidence - this is a huge failing of the so called direct contribution schemes.

  5. I have to be honest, I am probably one of those people that needs to take responsibility and really look into pensions. My issue is that I just don't understand is not my forte and there are so my clauses and opt outs that I just ended up completely and totally baffled!! I have a pension which I pay into (not a lot I admit but then I'm not earning a lot!) and lovely husband has a pension that he pays into, we have savings which we add to each month and we both have life insurance...we're the only ones of our group of friends that do! Most are still struggling to pay off Uni debt, pay rent and save for a deposit for a house! It's not easy to think so far ahead when the here and how is so tough!

    On a different note, good luck with the reading tonight! If I had been in London this week I would have come along but I'm in Swindon. (I did try e-mailing you but it bounced back!)

    C x

  6. A very interesting article, you have made some great points. Like you have said, pensions are so complex and will continue to become increasingly more complex. However, they are such an important part of all of our lives so we can't just ignore them.