Telegraph 'Expert View' - The Challenge of Pension Reform

by Dr. Ros Altmann

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Will the new Coalition rise to the challenge of overcoming our pensions crisis? I certainly hope so, for all our sakes.

There isn't much time left. From next year, the baby boomers start reaching age 65. Millions of people in their fifties and sixties are at risk of a miserable old age, as their pensions will pay out much less than expected, annuity rates have plummeted and those who saved prudently have seen their interest income all but disappear.

This crisis affects everyone, even the young. If an increasing proportion of the population retires without much money to live on, spending, production, consumption and demand for services will be hit, leading to long-term economic decline.

For years, while final salary schemes were falling apart and replacement money purchase pensions were obviously far less generous, politicians fiddled and tinkered with pension rules, adding to confusion, while failing to address the underlying problems. The last Government will go down in history as the one that destroyed our once-thriving pension system.

What went wrong? For too long, Government ducked the issue of retirement funding. It kept cutting state pensions, even while employers were closing traditional final salary schemes. Over-reliance on equity returns left all pension funds in trouble, as falling interest rates and rising longevity made pensions far more expensive than ever envisaged.

Instead of radical reform of our hopelessly complex, inadequate state pension, Government extended means-testing to nearly half of pensioners, which penalised private pensions. Pension schemes were over-taxed and over-regulated, while lax regulation made it far too easy to borrow, so Government discouraged saving just when more pensions were needed.

What can we do now? Those in their fifties need urgent help with financial planning. The Coalition proposes a national financial advice service and an annual financial healthcheck. This cannot come soon enough. People have to understand financial reality. Even £200,000 pension savings will only buy an inflation-linked pension of around £100 a week from age 60. In fact, the average pension fund is just £30,000, giving under £15 a week!

So, pensions alone cannot solve this pensions crisis. We have to rethink retirement too. Most people will simply be unable to afford a 'traditional' retirement. They cannot save enough in 40 years of work to provide a decent income to live on if they stop work altogether at 60 or 65 and live for another 30 or 40 years - which many will do.

As we are living longer, healthier lives, most people in their 60's are not 'old' in the traditional sense. This is great news. But society and the labour market have not kept up with these tremendous advances. We still throw people on the scrapheap, work-wise, according to chronological age, not ability or desire to work. This is crazy. The Government's plans to abolish default retirement ages are welcome, but not enough.

We need to think again about how we live our lives. There is a whole new phase of life waiting to be grasped - 'bonus years' - working part-time into our 60s or even 70s, gradually reducing hours, with more leisure time and more money to spend. This is a much better lifestyle than stopping work altogether and having little to live on.

The solution lies in radical rethinking of both pensions and retirement. If we improve the flexibility of pensions, without forcing people to lock money away for decades, they will be more likely to save in the first place. If we ensure that the state pension is a decent, but flat-rate basic minimum, on which private savings can be safely built, without means-tested penalties, then pension savings can once again be safely promoted to all workers. If we also encourage part-time work in later life, we might finally sort out the pensions crisis.

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