Yorkshire Post op-ed: Pensions – we all face a poorer future
by Dr. Ros Altmann
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Amid all the headlines about economic crisis, fiscal stimulus and G20 agreements, there is a hidden catastrophe unfolding. Not only have pensioners and savers been knocked for six as interest rates approach zero, pensions themselves are under threat. This threatens the retirement prospects of millions of British workers.
A large pension consultancy firm – Aon – has just announced that it plans to cut its contributions to its workers’ pensions. This is the thin end of the wedge I’m afraid. It seems to me that if one of the country’s leading pension consultancies is signaling that employers should cut pension contributions, then workers will be heading for poorer retirements. The writing is clearly on the wall and it seems inevitable that other employers will follow.
What does this mean for your pension? Unless you can save a lot more yourself, you will find your later life income will not match your expectations.
It is understandable that employers want to cut costs in the current environment and it is inevitable that people struggling to survive on a daily basis will not be rushing to save. However there are very worrying longer-term implications of employers gradually pulling out of pension provision.
There has been an ongoing trend for employers to cut back their workers’ pension provision. Over the past ten years, almost all private sector employers have closed their final salary pension schemes (where employer contributions are often over 20% of salary) and replaced them with money purchase schemes, which have much lower employer contribution rates of nearer 10%. Aon has just signalled that employers cannot afford this level either and is proposing to cut its standard contributions back to just 6% of salary.
What next? Well, believe it or not, the Government plans to help employers cut back even more soon. Come 2012 it plans to introduce compulsory employer contributions for workers who choose to contribute to a pension, but this new system of personal accounts will only require employers to contribute 3%! I have consistently warned that employers will see this as a green light to cut contributions back to this 3% level and that pension provision will get worse, not better as a result. But the plans are going ahead anyway. The reality is that there seems an unstoppable momentum to destroy what’s left of employer-provided pensions.
This is a disaster for future pensioners. This is because, at the same time as employers have been pulling out of pension provision in the past years, unfortunately the state pension has been continuously cut too.
In fact, our state pension is about the lowest of any developed country and it has relied on employer and private pensions to supplement these meager state payments. But private pensions are being scaled back and as employers cut contributions further, there is a looming disaster for millions of Britons, who will end up with little or no income other than the inadequate state pension.
But policymakers seem oblivious to the dangers. The short-term policy focus on trying to revive borrowing has penalized savers and pensioners. So the credit crisis has aggravated the pensions crisis. Yet we have a rapidly ageing population, with millions coming up for retirement in the next few years. What will they live on?
We have relied for far too long on stock market investing to provide the solution to our future income needs. This gamble actually underpins both state and private pensions. The Government could only get away with cutting the state pension because it forecast that private pensions – employer schemes or personal pensions – would deliver good income on top. Those forecasts were based on everyone achieving high returns on their long-term equity investments, but those returns have not matched expectations.
The costs and risks of providing pensions have been badly underestimated. While pension outcomes have disappointed many, policymakers have persisted with the old-fashioned thinking that employers can be relied on to provide pensions for their workers, or that individuals can rely on clever investment managers to produce good returns and decent pensions.
The prospect of employers cutting pension contributions is therefore very bad news. You can’t get big pensions from small contributions. As employers cut back again and again, and as individuals do not realize what is happening until it is too late, private pensions will dwindle.
This will be a disaster for the economy. From next year, as the baby boomers come to retire, they will face years in poverty, struggling to survive on inadequate state and private pensions topped up by means-tested handouts.
Meanwhile, of course, policymakers seem totally oblivious to what is going on. They have their own, guaranteed, taxpayer funded, recession proof pensions – is that perhaps why they do not recognise what is happening in the rest of the country.
We cannot go on as we are. Radical reform of both state and private pensions is long overdue, but seems to be low on the list of policy priorities.
The inevitable consequence of the credit crisis and of employers cutting pension contributions is that people will have to work longer – whether they like it or not.
At the moment we are focussing on disappearing pensions, soon we will be looking at disappearing retirement!