Questions of perspective
This month’s Off The Record considers two topics instead of the usual one.
The first topic is the intention of some European governments to raise the statutory retirement age.
In Germany the Rürup Commission has recommended raising the retirement age from 65 to 67, and there are similar proposals in France and Italy. Many European governments are also looking at ways to discourage early retirement.
The second topic is the question of whether young people should be encouraged to put money into an personal pension plan if they are not already members of an occupational, industrywide or collective pension scheme. The issues was raised recently by Alan Pickering, the chairman of the European Federation for Retirement Provision (EFRP). He said bluntly that he would not advise people in the UK who were in their 20s and 30s to put money into a personal pension, although he would advise them to join an occupational pension scheme.
Individual (third pillar) pensions are an important form of retirement saving in countries such as France where there is no funded second pillar. Yet they may not necessarily be the best way of saving for retirement. So are there other more suitable forms of long-term investment for retirement saving? And if so, what are these likely to be?
We asked for your views. As always, we found a good spread of opinion, with few cut and dried solutions. There is only grudging support for the strategy of raising the retirement age. A small majority of the pension fund managers and administrators who responded to our poll (52%) agree that this is the best solution to the problem of ageing populations in Europe.
“Given increased longevity the retirement age clearly has to be adjusted upwards,” one UK manager points out. However, there are reservations. “Raising the retirement age is not the best solution but it is the most effective one,” a Swiss fund manager notes.
An alternative solution – reducing retirement benefits to avoid raising the statutory retirement age – draws a mixed response with a slight majority (55%) against the idea.
Significantly, there is strong backing (91%) for suggestion that people should be encouraged to remain at work longer. The key issue here is choice. People should be allowed to decide whether or not they wanted to work beyond the statutory retirement age. This emerges strongly from responses to our question about what age statutory retirement should be set. We suggested a number of options – below 60, 60, 65, 67, 70 and ‘flexible’.
A clear majority (70%) want some sort of flexibility in retirement. The most popular option is retirement at 65 with an option to continue working. The largest single group of managers polled (30%) choose 65 as the appropriate retirement age followed by retirement at 67 (22%), retirement at 70 (9%) and retirement at 60 (4%).
Of course, much depends on the time horizon. As one Swedish manager comments dryly, “one has to see this in the perspective of the years remaining. A pension at 62 is uninteresting if you expect to live to 60 but interesting if you live to 70. And if you live until 85 who will pay?”
But should flexibility include the option of early retirement? Most European governments are trying to cut back on provision for early retirement in an attempt to reduce their pensions expenditure. However, many of these governments earlier encouraged early retirement as a solution to the problem of long-term unemployment. Is this still an argument for retaining early retirement? A clear majority (61%) think not, and a larger majority (70%) agree that governments should actively discourage early retirement – for example, by removing incentives to retire early.
There is some dissent. Some managers feel that exceptions should be made for people working in hazardous or stressful occupations: “For some professions it would be justified to retire earlier,” the manager of a Belgian pension fund points out. Others argue that if people can afford to retire, they should be able to do so. “People who have the resources should be able to retire early if they wish,” says a UK pension fund manager.
Overall, there is a feeling that government tinkering with the statutory retirement age and provisions for early retirement do not tackle the wider issue of how to creates the necessary framework for people to be able to decide the timing of their retirement themselves.
The manager of a Belgian pension sums up this feeling: “I think there is a huge gap between that straightforward statement that higher retirement age equals less pensions and more contributions and the expectations of people that they will enjoy a long retirement period with a good living standard after a stressing career.
“Raising retirement age should imply that flexible formulas are developed that do not really fit into our mental schemes – part time, moving from executive to advisory role, taking a lower salary. The retirement age should be an individual choice, with people being more aware of and bearing the cost of their decisions, and ideally building the necessary savings during their careers to be able to enjoy decent living conditions at retirement.”
Building the necessary savings is the second topic of our poll. How is it to be done? If young people do not belong to a company or industrywide pension scheme, should they be encouraged to pay money into a personal pension plan of their own?
Here, pension fund managers take issue with EFRP chairman Alan Pickering, whose advice was “No”. A substantial majority (74%) said they would advise young people in that position to start saving through a pension plan.
We also wondered what was turning young people away from personal pensions. Was it the inflexibility of the benefits, notably the requirement to buy an annuity? Was it the high investment risk or was it the high management charges?
Most managers (61%) feel that high management charges are the biggest drawback to a personal pension. More than half (56%) think that the inflexibility is a disincentive to save. “The obligation to purchase an annuity, with the capital being lost to the provider after a spouse has passed away, is an anachronism and is fundamentally wrong,” says one pension fund manager. Only a minority (30%) feel that risk is a factor.
Some cite the lack of accurate or useful information. “There is very little knowledge about these pension schemes. Lots of people are already contributing to third pillar pension schemes without knowing what they are actually investing in or what the costs are,” says one manager.
But perhaps the most withering observation comes from the manager of a Swedish pension fund. “There are better forms of retirement saving than a pension,” he says.
With this thought in mind, we asked which alternative forms of personal investment were likely to grow in importance in the next five years: investment in property (including home ownership) mutual funds, bonds, and equities. There is a clear preference for mutual funds, which are backed by a substantial majority (87%) of managers. This is followed by property (61%) bonds (52%) and equities (35%). Other unprompted asset classes are cash and alternative investments.
If people are more likely to save for retirement other than through a pension perhaps the tax authorities should level the playing field and grant all forms of personal investment the same tax-favoured status as pension? However this proposal receives only limited support (43%).
Clearly one theme unites both topics of this month’s Off The Record – people’s lack of awareness of both private and public pension provision. A UK pension fund manager is scathing: “Education on personal finances – savings, mortgages, pensions and loans – should form part of schools’ education programme. The lack of understanding of the implications of the under provision in pensions or the true cost of loans among the wider public is shocking.”
The manager of a Portuguese pension fund is equally forthright. “The main issue is to educate people and make them understand that the ‘welfare state can no longer cope with old age retirement. That’s why people have to start saving for retirement at an early age and follow somewhat the American model.”
Well, we asked and you told us.