Government Inherited a Pensions Crisis after years of policy mistakes
Policies will do more to reinvigorate pensions, than retirement
But proposals for reform will lead to massive industrial unrest
by Dr. Ros Altmann
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The Coalition promised it would ‘reinvigorate pensions and retirement’. One year on, how has it done?
The Government certainly cannot be accused of ‘pushing pensions into the long grass’! It has almost been a struggle to keep up with pace of new proposals. Overall, it has done more to reinvigorate retirement, than pensions! Having inherited a pensions crisis, there has been a barrage of reforms, many of which are hugely significant and long overdue, most are heading in the right direction, but unfortunately some are hugely unpopular. In fact, unions are threatening massive industrial unrest over the proposed pension changes.
Here is a summary of the proposed measures, with an assessment of their impact:
|1. End Default Retirement Age||Brilliant, could reinvigorate retirement|
|2. Change statutory pension increases from rpi to cpi||Very unpopular. Future pensions will be lower (but employers and taxpayers could save money in future)|
|3. Introduce ‘triple lock’ for basic state pension – rise with highest of cpi, earnings or 2.5%||Sounds good, but impact diluted by move from rpi to cpi|
|4. Radical state pension reform Green Paper||Brilliant for future pensioners, especially women, but current pensioners won’t benefit. Ending mass means-testing is essential|
|5. Increase State Pension Age||Right direction, wrong execution – too soon to make big changes from 2016. Very unfair to raise women’s state pension age a second time – and by over 1 year for half a million|
|6. Proceed with auto-enrolment & NEST||Good in theory, but may be a disaster in practice, especially if no radical state pension reform. Danger of employers contributions cut to 3% minimum, need more flexibility of pensions, beware administrative errors|
|7. Public sector pension reform – raise contributions and pension age, change final salary scheme to career average||Right direction, but is it fast enough? There will be strikes anyway! 3% real discount rate still hugely underestimates costs to taxpayers|
|8. End mandatory annuitisation||Great for top earners, but won’t help most people. Annuities hit by low rates and QE|
|9. Reform pensions tax relief – £50,000 annual contribution limit||Fantastic for 50% taxpayers and higher earners, no help for basic rate taxpayers|
|10. Preserve pensioner benefits, e.g. Winter Fuel, free bus pass, TV licences||Popular, but Winter Fuel Payments reduced despite high inflation and fuel prices|
The government’s proposals are overall moving us in the right direction, although they benefit the better off and may hurt the most vulnerable pensioners. They are being fiercely resisted. Unfortunately, our pensions crisis was allowed to develop for so many years that unrealistic expectations have built up which will prove difficult to change. But as the demographic and economic realities hit, and as life expectancy continues to rise (which is great news!) change is essential.
The result of these policy proposals so far, however, is that 6 million public sector workers are up in arms over the public sector pension changes, half a million women feel desperately unfairly treated by the decision to raise their state pension age for a second time by more than one year and the Government’s decision to uprate pensions only in line with cpi rather than rpi is being challenged in court by a Judicial Review. Millions of pensioners are also aggrieved at not being included in the future state pension reform proposals.
On the positive side, though, employers can no longer sack anyone just for being age 65 and record numbers of the over 65s are working longer. This could be good news, although it is not normally portrayed as such. Those who are fit and healthy – and increasing numbers of people in their 60s are – can now think about working longer to earn more and to have a more fulfilling lifestyle, with more money to spend in their old age. Part-time work needs to be encouraged, as this can offer people a new phase of life – ‘bonus years’ – when they keep working and earning, but at a lower pace than when they were younger. Surveys show that more older people want to work – and not just for the money but because they enjoy working, they like feeling useful and know that they have many decades of life ahead of them, so, without huge pension income, they will need more money to be able to enjoy a good lifestyle.
The Government seems to have done more to reinvigorate retirement than pensions. Increasing the state pension age will ensure people stay in work longer than previously. Pensions for top earners have improved in many ways, but for the majority of pensioners, the outlook is less favourable. Pensions – both state and private – have become less generous since the Coalition came to power, due to the impact of rising inflation and lower interest rates. Of course, this is partly a deliberate policy, with the Government wanting to save money on pensions and, therefore, having to find ways to cut costs as life expectancy continues to rise. However, savers’ income has suffered from the impacts of high inflation and ultra low interest rates and annuity rates have also been hit by low interest rates and Quantitative Easing.
Linking pensions in future to cpi rather than rpi will save significant amounts of money but is unquestionably making future pensions less generous.
NOTES FOR EDITORS:
Final Salary Schemes: Are still in trouble, with large deficits. For employers who can actually change the rules of their defined benefit scheme uprating, changing from rpi to cpi could be good news, because it will save costs in the long-run. For members, however, their ultimate pension may be lower than it other wise would. Of course, if this improves the affordability of the employer pension promise, then moving to a lower uprating could help avoid the much sharper reductions of the PPF.
NEST is proceeding, with all workers starting to be automatically enrolled into a workplace pension scheme from 2012 onwards. This is good news for the pensions industry, but not such for some individuals who may find their pension savings do not deliver much if any pension. Without the radical state pension reforms that are being proposed in the Green Paper, NEST could end up being a disaster. More flexibility is required in the pensions vehicle, otherwise millions of the target market will opt out and the administrative and investment risk problems are also being underestimated. Employer contributions are likely to be cut back to the 3% minimum, so this could be a very popular move with employers, who are, on average, currently contributing over twice the statutory minimum to their workers’ schemes, but will mean those who currently have an employer pension scheme will end up with lower pensions.
Public Sector Reforms: The highly charged proposals around Public Sector Pensions Reform are being fiercely fought. Accepting Hutton Review recommendations, means moving to career average away from final salary, uprating future pensions in line with cpi, increasing pension age for future accruals in line with rising state pension age, workers’ contributions rising by an average of 3% for workers. These are moves that will save costs but may not be sufficient. Possibly scrapping of contracting out would be a big money saver for the short-term. The Hutton recommendations are moving in the right direction but retaining a 3% real discount rate is out of touch with reality and means costs of public sector pensions are still grossly underestimated
Anuitisation: Ending mandatory annuitisation is a step in the right direction, but will only really help the top earners. The vast majority will still be forced effectively to annuitise and yet the policy of ultra low interest rates and QE has made annuities significantly more expensive.
Annuity prices have been hit by the extended period of ultra low interest rates and QE. Keeping interest rates at record low levels has also damaged pensioners’ savings income and the resultant sharp rise in inflation, which is not being curbed, means many pensioners are facing sharply falling standards of living. With both food and fuel prices having risen sharply, many pensioners may be struggling with both heating and eating costs!