Moving Pension Thinking into 21st Century

by Dr. Ros Altmann

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

Almost every day the newspaper headlines focus on our ‘pensions crisis’. We are told people are not saving enough money to secure themselves a decent income in later life, companies are closing their pension schemes, unions are threatening to strike to protect pensions and tens of thousands of people, who have saved all their working lives are suddenly being told they will get no pension. The Government has introduced several new initiatives, supposedly designed to encourage people to put more money into pensions. They have not worked. What is likely to happen next?

I think we need a radical new approach. The problem we face is not so much a ‘pensions crisis’, but more a ‘retirement crisis’. It is a problem with the way we organise our lives and, until we address this, we will not get pensions right.

Pensions were designed to support people for the last few years of their life, once they were too old to work. They were introduced many decades ago, to help Government address the problem of poverty among the elderly and for employers to help look after loyal employees who had given lifelong service to a company. They were designed to last for perhaps 5 or 10 years. However, as people are now living much longer and retiring earlier, we are trying to make pensions last for 20, 30 or even 40 years. This is too long and is financially unsustainable.

Since the 19080’s, successive UK Governments have been trying to offload responsibility for pensions away from the State and onto the private sector – first to companies via occupational pensions and then also to individuals themselves, via personal and stakeholder pensions. However, this does not solve the underlying problem which has been building up. Essentially, pensions policy and our retirement culture have lagged way behind the changes in longevity, health status and labour market practices. Pensions need to be thought of as more flexible types of saving, which can be used partly to top up income and partly for support when near the end of life.

We need to re-think the way we live our lives. There is now a whole new phase of life, which previous generations could not have envisaged, waiting to be grasped. This is a period of years after one’s full time career, when one is gradually cutting down working hours and gradually increasing leisure time. It is a phase of part-time working, job sharing, mentoring, retraining for a new type of work and so on. This is a positive message. What we currently do is not healthy. One day working full time and the next day suddenly not working at all. This is also a huge waste of resources. Why should we pay people, who have a wealth of experience, not to work. Most of them would benefit from continuing to work in less stressful roles, to contribute to their own and to general national economic welfare. People will then not be so totally reliant on pension income for so many years in later life.

The present concept of fixed retirement ages needs to be rethought. Given that labour market practices are so much less physically strenuous nowadays, there is little reason for people to expect to stop working at any particular age. It could be left to the individual – depending on how healthy they are, whether they can afford not to work and whether they enjoy working.

If pensions are no longer expected to provide the only means of income support for older people, they become affordable again.

Pensions need to be re-designed, to support this new view of retirement. What we need is lifetime planning, not just pension planning, with people saving as much as they can during their working life, but not expecting this to support them fully for more than a few years at older ages. We need a greater range of flexible pensions products and flexible annuity products, taking into account the effect of variable retirement ages and flexible, gradual reductions of earnings in later life. Products need to accommodate the concept of taking part pension, perhaps being allowed to borrow against pension savings in order to fund retraining for this new phase of life after full time work.

An essential pre-requisite for such changes, however, will be for the Government to reform the system of State pension provision. At the moment, the State pension system is disjointed and confusing and policy in this area is blighted by a lack of joined-up thinking. The State pension comes in at least three parts. The Basic State pension, the earnings-related second State pension and then the means tested Pension Credit. Unfortunately, the means tested pension credit undermines our private pension system, because it effectively ‘taxes’ private savings by at least 40%. It is essential to get rid of this means testing disincentive, to ensure that private savings are not penalised by the Government. If the State pays a higher basic amount to older people, which is just enough to bring them above the poverty line, then there will be clear incentives for individuals to do their own saving, or to consider staying at work longer, in order to have higher incomes later in life.

Giving people the option of working longer and supplementing their income in older age would dramatically reduce the burden of support put on pensions. They could once again become affordable and people could save during their lifetime in a variety of different forms, to ensure a higher standard of living for all. Flexible pension savings, clearer incentives to save and removal of the disincentives of state pensions are where pensions should be heading next. What we are currently trying to do is unsustainable – pensions simply cannot be made to last for so long. People are living longer, the labour market has changed and pension thinking needs to move forward into the 21st Century. The sooner this happens, the better, for all of us.