New Blueprint for Retirement and Pensions
by Dr. Ros Altmann
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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
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
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
– 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The traditional ‘three score years and ten’ is so out of date.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
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
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.