A New Blueprint for Retirement and Pensions – Ros Altmann

    Ros is a leading authority on both private and state pensions,annuities and
    retirement policy. Numerous major awards have recognised her work to
    demystify finance and make pensions work better for people.

  • Ros Altmann

    Ros Altmann

    A New Blueprint for Retirement and Pensions

    A New Blueprint for Retirement and Pensions


    New Blueprint for Retirement and Pensions

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)


    Government could go into the next election claiming to have

    abolished the means test for the elderly. 


    could promise to pay the MIG plus, say, 20%, to everyone over age

    80, as of right.  No means test, no claim forms to complete, no

    hassle, just a decent pension from Government for all 80 year olds

    and above. 


    think this could be an extremely powerful political message. 


    is those at more advanced ages who are least able to cope with

    form-filling, least likely to take up the benefits to which they are

    entitled and most likely to have run out of any other sources of

    income.  The majority of voters would be able to identify with

    the social imperative of providing a decent standard of living for

    these people. 


    new system would be more affordable, very popular, seen as a truly

    radical change for the UK and could be tied in with other changes to

    demonstrate that this Government really has thought creatively and

    in a coherent fashion about the current problems of pensions and



    would recommend considering this change together with another major

    new piece of thinking.  We could introduce a whole new ‘phase

    of life’, which simply did not exist in the past.  This would

    offer people a tangible benefit from developments in the 21st



    could now be 4 phases: 


    – ‘full time work’

    – the new phase of life in which people gradually withdraw from the

    labour force 

    – and finally retirement (the last few years, when one is truly too

    old to work at all). 


    to the advances in medicine, nutrition, healthcare and health

    awareness, coupled with a reduction in the amount of heavy manual

    and dangerous working conditions in today’s workplace, most people

    are well able to continue working for much longer than in the past. 

    The traditional ‘three score years and ten’ is so out of date.  


    people will simply have to keep working for longer because the

    finances of current retirement and pension culture just don’t

    stack up.  It is not financially sustainable for people to

    retire in their 50’s, after paying about 30 years’ worth of

    pension contributions and then expect to live for another 30 years

    or more on those contributions.  It cannot be done.  


    soon as you allow for people earning for longer, perhaps

    contributing to a pension for longer, supporting themselves through

    their own means for longer, the finances of the ‘pension years’

    become manageable.  It is socially wasteful for people to

    withdraw from the labour force as young as they currently do. 

    I do not believe people generally want to retire in their 50’s. 

    They are often forced to do so.  The current final salary

    occupational pension structure encourages them to retire, rather

    than continue working at a reduced pace.  Those who are able to

    do so then go back to work elsewhere, but many can’t. 

    Society needs to change its methods of thinking about working in the

    later years of life.  If we can offer people the opportunity to

    work less than full time, this would be of great benefit to them and

    could be seen in a positive light, rather than the negative

    connotations that are currently attached to the ‘threat’ of

    raising the retirement age to 70 or beyond.  People do not want

    to have to work at full pace, under as much strain as when they were

    younger, but they also do not want to stop working altogether. 

    Working part time, job-sharing, gradually cutting down from 5 days a

    week to 4, to 3 and so on would be very attractive to many people.  


    is the way to solve the ‘pensions crisis’ of the future. 

    It will take a generation to re-educate people.  The key is to

    start building the social consensus for it now.  Employers will

    need to buy in to this, to perceive the benefits of retaining older

    workers, but allowing them to reduce their hours of work. 

    Unions will need to understand that current pension promises and

    early retirement expectations are unaffordable and that workers can

    benefit from staying at work longer.  They will retain the

    social contacts, the feelings of usefulness, the ability to

    contribute to society, the ability to fund their living expenses. 

    All these things are often lost on retirement.  Indeed, it is

    not healthy for people to suddenly give up work.  Some will

    perhaps want to do this, but most will not want to spend 30 or 40

    years without working.  Society cannot afford to allow this to

    continue.  Such a waste of resources and a drain on public

    funds makes no sense whatsoever. 


    older workers may be able to job-share (it has been done for working

    mothers, so why not for older workers?)  Others may be able to

    fulfil a mentoring role.  Some can be encouraged to re-train

    and change career – perhaps in a direction they have always wanted

    but did not have the chance to try before.  Society needs to

    start this debate rolling.  


    system currently does not recognise individual differences

    sufficiently.  The ‘official’ age of retirement concept

    could be replaced by a band of ‘flexible retirement ages’, say

    between 60 and 80.  Those who cannot genuinely work beyond age

    60 (and there are not that many of them now) can be supported on a

    lower level of state benefit and their own private pension (which

    will presumably be an impaired life type of annuity).  Others

    should be encouraged to start trying to work longer and accruing

    bigger pension entitlements, but gradually cutting down the length

    of time they spend at work.  Government is already putting in

    place the NewDeal50+, to try to help older people find work. 

    This scheme could be vastly extended to cater for this new phase of



    have about 20 years before the worst of the pensions crisis hits

    Europe.  This would be sufficient time to re-shape social

    attitudes and expectations.  We can plan for it sensibly now,

    or it can be forced upon us in the future, with the risk of panic

    reactions.  Surely it is better to start the debate and allow

    the social consensus to develop. 


    are other benefits of this new way of thinking about retirement and



    Private pension provision would be less discouraged, because people

    would need to build up less private funding as they would stay in

    work longer: 


    would be able to draw a very generous state pension at age 80, but

    they could live on private pensions before this.  There could

    be a combination of private pension provision and earnings from part

    time employment, as the means of support before the 80 year olds can

    claim from the State.  Before this age, support would be less

    generous and subject to a means test, in order to try to encourage

    people to still build up their own private level of savings. 


    Annuities could become much better value. 


    the point of view of private support for old age, the concept of an

    annuity which must be bought with one’s pension savings would only

    need to last until people are aged 80.  This immediately caps

    the liability which insurance companies need to underwrite and makes

    the economics of providing annuities much more attractive.  If

    people buy a 10 or 15 year annuity, rather than an unlimited

    lifetime annuity, the costs are more affordable and the income can

    be higher. 


    Annuity providers can buy matching assets to back annuities. 


    10 or 15 year annuity can be matched with bonds quite easily. 

    An unlimited lifetime annuity, however, is impossible to match,

    which means providers of annuities are taking on a large risk in

    terms of increasing longevity and the rollover of matching assets to

    back annuity liabilities.


    pension schemes are not safe.  


    DB scheme is only as good as the employer who provides it. 


    have not put in place any protection whatsoever to actually

    guarantee any level of pension to active scheme members.  Only

    those who have already retired are really protected.  Their

    rights have to be met first, plus any increases.  Then deferred

    pensioners.  Workers who are still contributing may not even

    get their contributions back!  This fact is not yet appreciated

    by policymakers and is not reflected in the Pickering or Sandler

    reviews.  Even after Maxwell, the 1995 Pensions Act, the Myners

    Review and all other recent debates and Reviews of pensions, this

    fundamental flaw in the design of DB has not been focused on.  


    legislation allows employers to renege on their pension promises at

    will.  Employers are not allowed to cut workers’ wages for

    doing the same job, but the ‘deferred pay’ arrangements of

    pensions can be cut at will.  An employer running a DB scheme

    can simply walk away from his obligations and wind up the scheme. 

    Worse than this, the Directors can and have, in some cases, retire

    early before winding up the scheme, to ensure that they get their

    huge pensions paid in full, whereas the workers may get nothing!  


    insurance is in place to ensure that people can get anything back

    from the scheme.  If the assets of the scheme are insufficient,

    workers may get no pension at all, even after contributing for 30

    years!  The MFR guarantees nothing.  Even if fully funded

    on the MFR, this will only buy 70% of expected pensions for the

    workforce.  And MFR valuations are only done every 3 years. 

    If markets tumble during that time, the value of assets in the fund

    could fall dramatically and there are no safeguards to ensure that

    the level of pensions covered must be protected.  


    new Myners ‘transparency statement’ provides even less security

    for DB scheme members.  If the assumptions used are wrong, the

    asset allocation could result in significant losses for the fund and

    mean that people are still not provided with any certainty of a

    level of pension they will receive. 


    schemes wind up, it can take many months for pensions to be paid

    out.  The members of a DB scheme in wind up face two major

    uncertainties.  They do not know how much pension they will

    receive, nor do they know when they will receive it! 


    has been structured in a manner which is much more protective of

    employers than the workforce.  Pensioners are protected to a

    large degree, but those not yet retired are not.  Even if they

    are aged 64, they may not get any pension at all.  Some kind of

    insurance protection must, surely, be considered. 

    Alternatively, a DC scheme may be preferable for many people.  


    pensions must be the provision of the future.  They can

    accommodate more modern working practices easily, can provide some

    form of guaranteed pension, can be transferred easily from job to

    job and are readily identifiable as belonging to the individual. 

    They are not at the mercy of the employer, they are more transparent

    than DB, more accountable and more flexible.  DB is old

    fashioned, unsafe and unreliable.  Let’s focus on getting DC



    credit is a major disincentive to pension provision 


    credit was introduced in a hurry, as a means of addressing the

    ’75p’ pension increase problem.  It is very helpful for

    today’s pensioners, but it has the major problem of

    disincentivising pension saving among the very groups which

    Government has been trying to encourage to put money into pensions! 

    The policy is not sustainable and will have to be abandoned sooner

    or later.  Why not come clean and say so. 


    pension credit is supposed to ensure that ‘it always pays to

    save’.  This is simply not true.  For someone with less

    than full entitlement to the Basic State Pension, they will still

    lose the first part of their pension entirely, even with pension

    credit!  The policy was supposed to ensure an end to the

    disincentive effect of 100% marginal tax rates.  It does not. 


    for those who are not taxed at 100%, the marginal tax rate is 40%. 

    This makes it still inadvisable for many people to put money into a

    pension.  Pensions are currently not suitable for a large

    proportion of the population.  Pension credit policy means that

    people have to amass savings of about £80,000, in order to be sure

    of escaping the 40% tax zone in retirement.  Most people cannot

    be confident of being able to do this and would, therefore, be

    better advised to save in a different form (such as an ISA) or not

    to save at all!  Just offering these people a simple pension

    and no advice will mean that Government will be guilty of mis-selling

    pensions to millions of people.  Unsuitable products are still

    unsuitable, irrespective of whether they are cheap and simple. 


    what can we do? 


    we must make pension credit temporary.  


    we must exempt a certain part of pension from the pension credit



    we must allow people to undo the pension when they retire, pay back

    the tax and take the MIG instead if they wish. 


    possibility may be to offer much more generous incentives to people

    to put money into the pension in the first place.  A £ for £

    matching scheme would make the 40% tax rate involved in the pension

    credit less obviously unfair.  At the moment, basic rate tax

    payers get only 22% top up from Government and, therefore, the

    marginal tax rate of 40% makes the economics unattractive.

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