Pensions crisis – it’s real and getting worse

by Dr. Ros Altmann

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This excellent report provides a timely reminder of just how serious the UK pensions crisis really is.

The comprehensive survey evidence confirms what most people in the industry have been seeing for years now – that most people have lost faith in investing in pensions.  There has been a disengagement from the formal process of pension planning, with increasing numbers relying just on property investment for their retirement income.  However, the Pensions Report also confirms the increasing divisions between the relatively small proportion of the population who will have a good pension and the majority who seem to be on course for a retirement on the breadline.  Especially since 2000, private pension provision in this country has been crumbling, as trust and confidence have ebbed away from what was once a private pensions system envied by others.

Most people have no idea what pension provision they have made, or what they need to make and there is no trusted source of advice.  As the FSA says, this is a serious issue because ‘the average UK adult lacks the financial skills to make the necessary long-term financial planning decisions which are increasingly required of them’.  The increased regulatory and financial burdens on advisers have driven them to focus on the high net worth, higher margin clients, leaving the majority of the population locked out of the advice process altogether, even though they are surely in need of help in making complex financial decisions.

The real danger lurking in the future, however - for providers, for the Government and for the general public - is that state pension policy is undermining private incentives to save and has rendered pensions an ‘unsuitable investment’ for the majority of lower and middle income groups.  Those with high debts or those with not many years to go to retirement, are likely to find that money put into a private pension could be money wasted, because the resulting pension will merely replace some or all of the means-tested benefits they would otherwise have received anyway.  Any national scheme of personal pension accounts, into which millions of people may be auto-enrolled, will not be safe unless there is radical state pension reform to end the mass means-testing of pensioners.  However, the recent White Paper will still leave up to 50% of pensioners dependent on means-tested pension credit in future.  Under these circumstances, it could be dangerous for advisers and providers to encourage people to join a national pension scheme.

One staggering finding of the Pension Report survey was that none of the respondents seemed to recognise the tax relief benefits of saving in a pension.  This suggests that there needs to be a much better incentive mechanism for pensions, as well as removing the disincentive of state pension credit.  Until the Government understands that it must address the ‘demand’ side of pensions (getting people to understand and trust pensions) not just ‘supply’ (offering cheaper products) - it is difficult to envisage a sustainable solution to our pensions predicament.  The Pensions Report has highlighted just how serious the UK pension problems are.  Let us hope that this galvanises policy makers into recognising that far bolder reforms are urgently required.

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