Letter commenting on pension burdens faced by UK employers

by Dr. Ros Altmann

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It was interesting to read that the majority of employers know that the pension contributions they are making for their employees will not deliver generous pensions. The question we need to consider is why this should be a surprise to anyone.

Pension expectations need to be adjusted. Pensions were originally designed to last for 5 or 10 years, to reward long-serving employees for loyal service and prevent them leaving work and living in poverty for the last few years of their life. Nowadays, however, the average job tenure is around 5 years, but we are trying to make pensions last for 25, 30 or 40 years. Can employers really be expected to shoulder this burden? The cost of providing what used to be thought of as a 'standard pension' (around two-thirds of final salary) has become so expensive that it is generally now unaffordable for all but the highest earners. Over 20% of salary would probably need to be put aside for 40 years, to provide a good pension for 25 or 30 years of retirement. Employers contributing 5% or even 10% of salary to a money purchase scheme are, therefore, quite correct to believe that this is unlikely to provide a generous pension.

Some serious re-thinking is required. Pensions policy is light years behind the changes in working practices, demography and health status and the sooner we revise social expectations of retirement and pensions, the better. The Government and the individual will need to shoulder more of the burden in future, since employers alone cannot afford the current expectations of pensions.

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