Ten years ago, nobody believed that occupational pensions policy was exciting. Employers thought they could safely leave things to the actuaries, investment managers and consultants. Employees took it for granted that their pensions were secure.
Demographic change, longer life expectancies and declining asset prices are said to make final-salary pensions unaffordable in the future. Most employers have closed their final-salary schemes to new employees and now offer defined-contribution alternatives.
The Association of British Insurers has calculated that the UK has a 27bn savings gap. If private saving fails, then the only alternative will be for the state to shoulder the burden – an option that all the major parties have identified as too costly, demanding unacceptable increases in taxation.
Adair Turner’s Pensions Commission has set out the rather unpalatable alternatives confronting policy makers. Simply put, we must either work longer, save more or accept lower incomes in retirement.
Most workers make the entirely rational judgement that they will never be able to defer enough consumption today to save for an adequate pension in the future. This suggests that any increase in private pension provision depends on a partnership between the state, workers and employers. There must be a decent basic pension that keeps people above the poverty line, but those workers who can afford to save should do so and employers should contribute too.
It is difficult to give clear advice to employers and employees at a time when policy is in a state of flux. Much will depend on decisions about the level of the basic state pension and the role of means-tested benefits in the medium term.
Turner has argued forcefully that the UK’s voluntary system of pension provision really is in the last-chance saloon. If there is no evidence over the next year that employers and employees are making independent efforts to boost saving, then the case for compulsory contributions from both becomes much stronger.
Most workers approaching retirement age today can be confident that they will maintain their living standards in retirement. Pensioner incomes are the highest they have ever been and will continue to rise in the short term. However, the real problem confronts those who will reach retirement age in 15 or 20 years’ time. If current trends continue, they run a serious risk of retiring in poverty.
Employers need to recognise they have a responsibility to encourage their workers to save. That means, in turn, that employers ought to be making some contribution to workers’ pensions. Those employers who fail to do anything to help their workers save for retirement may face significant recruitment and retention problems in the future.
But all of this is wishful thinking without a new pensions settlement that can secure the support of political parties, employers and the public.
The response to Turner suggests that the politicians are reluctant to abandon their standard partisan rhetoric. They must do so in the future if we are to meet the pensions challenge.
Division within the Government
The issue is also dividing the Government. A key department is Work and Pensions, a long-standing advocate of a more enlightened approach to late-life working. Former Secretary of State Andrew Smith called for an end to the cliff-edge of retirement and a clear distinction to be drawn between the age at which individuals become eligible for their state pension and the age at which they choose to retire from paid work. Its research points to the need for more flexible extensions to working lives and more choice in the retirement process.
The DTI has adopted a more pro-business line, cautioning against legislation which undermines the competitiveness of UK businesses. It is drafting the legislation, along with other parts of the Equal Treatment Directive. But other government departments are also embroiled. The issue is further complicated by Civil Service reforms which will involve large-scale departmental relocations and restructuring. The Civil Service retirement age of 60, plus the availability of early retirement packages, have tended to ease these kinds of reorganisations and certain officials may see mandatory retirement as assisting in this.
The Government has now set up the Social Partners Group – a stakeholder committee of employer, employee and union representatives – to agree a way forward.
David Coats, associate director, policy, The Work Foundation