The so-called “pension crisis” does not have a discreet, single cause. Rather, it is comprised of a number of issues which have combined to present a mixture of problems.
Firstly, the percentage of people aged over 65 is set to rise in the next 30 years from 16% to 25%. This presents a simple problem: there will be fewer people of working age to support the older population. The demographic trend to longevity is linked to the improvement in living conditions and health of older people, and also to a reduction in the birth rate. So how will we support a growing number of pensioners?
Defined Contributions
Perhaps the most widely publicised aspect to the pension’s crisis is the fact that defined contribution schemes have not performed as well as expected. Commonly found in the private sector, defined contribution schemes are based on money purchase arrangements, where the member pays in at a particular level, and receives a pension based on the value of the fund, according to its investment performance. The risk in this arrangement remains with the member. The problem is that most of these schemes invested heavily in equities markets, and as such face substantial deficits as markets have underperformed expectations. Consequently, those relying on their private defined contribution scheme for a comfortable retirement may be sorely disappointed. In previous years one might have drawn comfort from the possibility that an Englishman’s home is his castle – an equity release scheme could have cushioned the blow. However, falling house prices are having an effect on the availability and attractiveness of such deals.
The public sector is suffering from its own pension’s crisis. The Organisation for Economic Co-operation and Development has estimated that, with generous pension provisions for its staff, the public sector has a total liability of £1 trillion for public sector pensions. This is particularly worrying given that this has to be recouped from the private sector and made up out of taxes, present and future.
People Without Pensions
Perhaps the least publicised but most worrying aspect of the pension’s crisis is that more than half of the British public have not made any personal provision for their retirement in any event. It is not clear from the figures available whether this low take-up in pension’s savings is due to apathy, (mistakenly) believing that the state will provide an adequate pension for a comfortable retirement. On the other hand, with housing and food bills being so high, it is possible that people have wanted to save but have not been able because they cannot afford to. Making a regular contribution to a pension is another bill to pay at the end of every tight month.
With some horrifying figures being thrown around as shortfalls (the OECD holds that British pension pots fell by 17.5% last year), action needs to be taken to stem this crisis. The Government is already raising the state retirement age, so that the state pension will shortly not become due until 65 for both men and women, which will rise gradually to 68 by 2046.
From 2012, the Government intends that all employees will be automatically enrolled in a pension savings scheme, with a small percentage of their earnings being deducted automatically. This is a form of soft compulsion, as there will be the choice to opt out, but the Government assumes that most people will just think that it is too much hassle. Employers will also notice a change, as they will be forced to contribute too. However, it is naive to think that businesses, which exist to generate profit, are going to absorb these changes without trying to claw back some of the costs themselves. The employers’ contributions will no doubt be derived from higher prices for consumers, lower returns for investors and pay freezes or lower pay rises.
The business community is concerned about the effect this will have on the competitiveness of UK plc. After all, it represents a significant cost to running a business here if you have to make large contributions to employees’ personal savings scheme. It remains to be seen whether this will have any effect.
The Government provides a Pension Credit scheme, which is a means tested benefit purporting to ensure that all pensioners have a minimum weekly income. However, the take up on this is low, particularly among those who were alive in the Second World War whose pride and dignity prevent them from applying for benefits. We will see whether the so-called “baby boomer” generation will have the same attitude when they bear the brunt of the pension’s crisis.
