06.08.09

Unravelling the Pensions Tangle: Ros Altmann's Guest Blog

I am delighted to introduce Dr Ros Altmann as the first guest to TAEN’s blog site. Ros is a member of TAEN’s Trustee Board, and a renowned expert on pensions policy, investment banking, savings and retirement.  She successfully spearheaded a campaign, lasting over five years, to force the UK Government to compensate 150,000 workers who lost their final salary company pensions after being falsely assured by the Government that their pensions were completely safe. Here she explains some of the tumultuous changes in the pensions world that have been going on around us, and offers some personal views.

For the past few years, the UK pensions crisis has been worsening dramatically.  Far from dealing adequately with the problems ahead, policy has tinkered around with the existing system and shied away from much-needed radical reform.  In the next few years, retiring baby-boomers will try to live on our state pension (the lowest of almost any developed country) and any private pension or savings they have accrued. But the credit crunch has
severely impaired private pensions, thereby significantly worsening the pensions crisis. This will lead inexorably to a ‘pensioners’ crisis, unless we make radical changes both to pensions - and retirement.

Until around 10 years ago, Britain had one of the best retirement savings cultures in the world - indeed we still have more money in private pensions in this country than the rest of Europe put together.  Unfortunately, however, a succession of scandals and policy errors has left us in a position where people often steer clear of pensions.  This is a demographic disaster. The demographic trends in coming years, as the baby boomers start to retire, mean there will not be enough workers to repeat past growth while at the same time pension savings are withering.

There has been a succession of policy initiatives - aimed at addressing the problems of both state and private pensions, but unfortunately they will not provide a long-term sustainable solution.  Reforms to the state pension will still leave us with just about the least generous and certainly the most complex state pension in the developed world.

Let’s unravel some muddled thinking. The word ‘pension’ actually means two different things, which have the same name. The original idea of pensions was social insurance, preventing poverty for people who were really too old to work. This is generally a state role, although 20th Century employers stepped in to provide social welfare via final salary pension schemes too. The word ‘pension’ also, however, refers to something very different:
long-term savings. This is normally a private responsibility, but again employers stepped in to help organise pension schemes.  Employers are now pulling out of pension provision, leaving individuals to manage on their own and this is where the crisis is deepening.

Governments have overly relied on employers and equity markets to provide good pensions, to supplement falling state pensions. But, with increasing longevity and unreliable equity returns, private pensions cannot provide enough income. The state then has to supplement pensioner income via means-testing nearly half of all pensioners, which unfortunately makes private pensions an unsuitable investment for the majority of the population.

The introduction of personal accounts, which will be a national scheme into which all workers will be automatically enrolled and will be designed to ensure as many people as possible are saving in a pension, will not work against the background of the current state pension system.  In theory, they make sense, but in practice I believe they will make pension savings worse, not better for many people and many will just end up saving to replace means-tested benefits.

My preferred solution would be to pay a ‘resident’s pension’ of around £150 a week to all older people - perhaps starting from age 70 or 75, which would at last end savings disincentives, treat women fairly, abolish means-testing and poverty for almost all the elderly and would be affordable in an overall context.

Finally, it is essential to reform the concept of retirement itself. Pensions alone cannot solve the pensioners crisis.  The more we can encourage and facilitate (not force) people to work beyond age 65, the better for all of us.  Policy at the moment works against this.  For example, age discrimination legislation does not protect anyone beyond age 65.  Also, the means-testing of pension credit penalises any earnings over £5 a week, thereby discouraging longer working lives and consigning people to retiring too early. What a waste of resources! There is a whole new phase
of life waiting to be grasped, that previous generations could not have dreamed of. ‘Bonus years’ where people work part-time, (just as has been achieved for working mothers), gradually cutting down but still contributing to their own income and the economy. Policy could and should encourage older people to benefit from these ‘bonus years’. Together with radical pension reform, we could once again have a system that led the world in addressing pension provision of the future.  It must entail longer working lives and the sooner politicians wake up to this challenge the better for all of us.