The UK has often been dubbed the ‘odd-man-out’ on the EU scene, neither fully in nor out of matters European – reflecting perhaps that narrow strip of water that separates it from the Continent.
When it comes to pensions, however, the UK’s differences could well be seen as its strengths.
While many of its mainland counterparts struggle with a growing demographic imbalance and a barely sustainable pensions budget - the legacy of generous state pension rights, the UK is not faced with the same quandary.
However, the UK’s problem is the opposite to that of much of Europe.
While the system may be affordable, for many it does not deliver. A growing number of UK pensioners face increasing hardship in retirement.
According to figures released earlier this year from UK pensioner action group, Age Concern, over two million retired people are living in households with income below the Government’s official poverty line.
And women are most at risk in retirement; faced with smaller state pensions and less likelihood of having a sufficient work-based pension top-up.
In its report, Age Concern also argues that occupational and private pensions are not helping enough people save for their retirement.
Its statistics showed that less than half of the working population are currently contributing to a private or occupational plan.
A recent report from Aon Consulting also appeared to confirm that British employees were losing faith in the ability of their employers to help them with their pensions.
The survey, conducted last August, collated responses from 1,500 individuals across the UK, of which 40% said they did not believe their company pensions schemes and state pension would provide for an adequate retirement.
According to Age Concern, the UK pensions system is “too complicated”; such that many people find it “hard to understand”.
“This is not surprising when many professional money advisers find it hard to keep on top of the increasing complexity of the system,” it noted.
The Government’s case has also not been aided this year by two high-profile occupational pensions scandals, one at Allied Steel & Wire (ASW), the other at Maersk.
The former involved around 800 workers at Cardiff-based ASW who lost large parts of their pensions when the firm folded with its scheme in deficit. Two UK trade unions are currently suing the government on behalf of the members of Allied Steel and Wire (ASW) seeking compensation for their members’ losses.
The latter concerned the wind up a DB scheme by the UK arm of shipping group Maersk, carried out entirely legally at an MFR (Minimum Funding Requirement) level, which was far below the pensions expectation of members. The company has since made up the difference, while the government has introduced a compulsory buy-out level to avoid any similar future occurrences.
However, Age Concern concentrated its fire at the level of state pension provision, claiming that it did not presently provide enough money to cover essential living costs. And, it suggested, things look like getting worse: “Its value will continue to fall in relation to earnings after 2003. A decent increase in the state pension could give workers on low incomes more of an incentive to save.”
Age Concern’s view is one that is shared in part by Alan Pickering, chairman of the European Federation for Retirement Provision (EFRP) and a former chairman of the UK National Association of Pension Funds (NAPF), as well as a former external advisor to the UK government on pensions simplification.
Pickering also believes the state pension is currently too low. He is further convinced that the future of both public and private retirement saving in the UK will only be safe if the government steps back meaningfully into the role of basic pensions guarantor.
“The state is the best provider of welfare and guaranteed income in retirement. The private sector can’t function unless that happens.
“I’ve been impressed by the way that UK society seems to have taken this argument on board. There are only two major bodies that don’t seem to have accepted this: the government and the TUC (Trades Union Congress), although even the unions are increasingly accepting the reality of bigger state pensions and later retirement ages.”
David Coats, head of economic and social affairs at the TUC, explains that the union movement recognises that social values are changing and that because life expectancy is increasing some people might want to stay in the labour market for longer.
However, he argues that working lives will never be extendible for some employees: “Whether it is a question of manual jobs for men or cleaning jobs for women, you don’t want to be doing that when you’re 70.
“Another problem is that if you increase the state pension to 70, as has been suggested, your average male manual worker in Manchester would never collect their pension, because their life expectancy is 69 years.
Adds Coats: “I think what we need to talk about is more flexibility and choice.
“The government has done a bit here in allowing people to receive a pension from an employer and continue working for them.
“However, I think we ought to be talking about gradually being able to exit the labour market and exercise real choice about when to stop working or gradually reduce the hours of work. If it’s just a statement from government and employers that says we can’t afford the current system and you are going to have to work until you drop, then that is not going to be acceptable to unions or working people in the UK.”
Pickering feels that when the current Labour Government came to power it had an ideal opportunity to make difficult, but necessary reforms. “If ever a government had a big enough majority to take difficult decisions it was this one. When it came to power in 1997, it knew that it was likely to get a second term in office. Friend and foe alike were telling them that the UK was in a golden age for pensions. “SERPS (State Earnings Related Pension Scheme) was paying out bigger benefits than ever before, most people who were retiring had good DB provision under their belt and the markets were making sure that DC pots were swelling. That first term was an ideal possibility to take long-term decisions where there would have been short-term pain that would ultimately have flowed through to long-term gain. They didn’t do that and they still aren’t being as bold as the situation demands. This close to an election with all the political infighting going in government I don’t see them being very bold now.
“I’m sure though that it is politically possible to produce a package, particularly because the basic state pension is so lousy that you could improve it quite significantly without bankrupting the country. “You could also phase in the changes between 2020 and 2030, because we will have moved the female pension age to 65 by 2020.”
However, the EFRP chairman is not all critical of the UK government, noting that they have taken positive steps recently to address the issue of better employment prospects for older workers – key to the success of any future increase in retirement age.
The forthcoming age discrimination directive from Brussels has no doubt helped focus minds here.
And as part of 2003’s pensions reforms, UK Secretary of State for Work and Pensions, Andrew Smith announced plans to pay a lump sum (the so-called Pensions Credit) of up to £30,000 pounds (E43,000) to people deferring their retirement age for five years – though he rejected an actual raise in the state retirement age. The announcement met with a mixed response, with some observers welcoming it, while others called it a gimmick.
Says Pickering: “I think the government has got into the public domain quite cleverly regarding bigger pensions and later retirement with the proposal to defer pensions to 70 with the offer of a lump sum or a bigger pension.
“Lots of accountants have done sums on this and are saying that it is not really worth anyone’s while to do it, but I think they’ve missed the political point, which is that the government is now saying that that there will be a meaningful supplement to the retirement pay out if you delay drawing it. History may see that as a watershed.”
The government’s reform bill this year; the thrust of which could be summarised as the Pension Credit, enhanced occupational pensions protection via a new ‘Pensions Protection Fund’ (modelled on the US Pension Benefit Guaranty Corp) and simplification of pensions taxation and retirement income statements, has been broadly welcomed though.
The new legislation also provides for a unified pensions regulator charged with a more “proactive” role.
The Department for Work and Pensions said the bill would “provide a balanced package of measures to ease the financial burdens and cut red tape for employers whilst offering a sustainable system of protection to individuals”.
However, some believe that the government has been excessively influenced by the recent scandals at ASW and Maersk into knee-jerk pensions policy.
Pickering is one who notes that the Pensions Protection Fund will not help with the cases in point, although he notes clearly that such scandals are unacceptable: “It will, however, increase costs for pension funds in the future, although whether it increases security is another issue,” he adds.
“I think what we will have is a situation of more protection for fewer and fewer people because the entry costs to pension funds will be that much higher. I imagine that many investment houses who are not strong in the DB marketplace will be rubbing their hands when they see these pension protection funds and compulsory buy-out levels because it is going to hasten the move to DC.”
Andrew Smith has certainly tried to take the populist high ground: “I know there are those who have questioned the need for such a body. I would invite them to join me the next time I am meeting redundant workers who were obliged by their conditions of employment to pay into a scheme for years, only to see their pension evaporate when the firm went bust,” he wrote recently.
Age Concern’s director-general, Gordon Lishman, however, was not about to let the government off the leash: “Proposals in the Bill only amount to minor surgery of occupational pensions when we really need the government to perform a major operation on the whole system. To really improve the health of our pensions, the government must examine the bigger picture, turn its back on means-testing and increase the basic state pension to at least £100 a week.”
This refocusing on state pension provision comes, no doubt, as a result of the conflicting views of where the UK occupational pensions pillar is going. The nub of the occupational pensions debate is whether UK plc has any actual obligation or incentive – either socially or business driven – to maintain defined benefit plans?
In a report earlier this year, Alexander Forbes Financial Services estimated the cost to companies of keeping a defined benefit scheme open would involve an increase of contributions from an average 11% of payroll to 23% – even if the scheme was closed to new employees. “We believe that for many employers struggling in this tough economic climate the DB scheme represents an unacceptable drain on company profits,” the firm said.
However, the TUC itself reported that it had analysed tax department data and found that in the five years to 2002, employers with final salary schemes “clawed back some 1.1 billion pounds” by reducing or stopping their contributions.
The TUC’s Coats believes employers have been closing final salary schemes to new employees in a pretty unreflective way.
“They’ve been following a herd mentality and throwing their hands in the air saying: ‘We’ve got a problem, equity prices have fallen, we’ve got the minimum funding requirement and now FRS17, let’s close our final salary scheme!
“They haven’t thought through the consequences for recruitment, retention and staff motivation. They also don’t think about the macro consequences of how people are going to provide for their retirement in the future. The net effect of closing final salary schemes and opening DC schemes for employees has not just been to shift the risk to employees, but also to reduce the employer contribution from an average of 15% to an average of something like 5-6%.
“If nothing else changes, as a result of these decisions we will have a lot of pensioners living in poverty and they are going to be knocking on the door of the government for an increase in the basic state pension or means-tested benefits for a decent retirement income.”
The situation is not lost on the government. In October last year, UK Minister for Pensions, Malcolm Wicks, called for a debate about the merits of defined contribution (DC) and defined benefit (DB) pension schemes - floating the oft-used term “hybridity” to express pension provision that needn’t be either purely DB or DC. To this end, UK Treasury moves to abolish taxation on savings and transfers under a total £1.4m pot look likely to make it easier for people to choose how they want to roll up their money for retirement.
Wicks noted, nonetheless, that the government was cold on the idea of compulsion, despite conceding that there had been a “collapse of confidence over the last couple of years in what the state can do and what the market can do.”
To counter perceptions of faltering work-based pensions, Wicks said the government was working with 61 companies on a new pension forecast idea, which would provide combined information about public and private pension provision. A further 600 companies, he said, were interested in the initiative.
In turn, a new Pension Commission, set up by the government to review private pensions and long-term savings, will issue its first report in 2005, with an interim report in the summer of this year.
The commission, chaired by Adair Turner, will focus on eight areas: demographics, retirement behaviour and trends, savings behaviour, impact of state pension on private savings, the economics of private pension provision, adequacy and expectations, macro-economic issues and the modelling of pension adequacy.
Coats at the TUC argues though that there is a need to reinstate the notion of shared responsibility on pensions and give it statutory backing – meaning, he says, both compulsory contributions from both employers and employees.
“We don’t need to move to full compulsion immediately, but we do need a conversation with unions and employers about where we are today and where we need to be in 10-12 years time, so that people don’t retire in poverty.”
Alan Pickering brings his argument full circle, by noting that if the UK is going to have a hybrid DB/DC system, as now looks likely, with the private sector becoming increasingly DC, then the argument for bigger state pension provision is imperative: “You cannot run a society with all pensions dependent on the market place or the market place buttressed by means testing – it just doesn’t work.”
The market downturn, allied with front-page national newspaper stories about pension ‘black-holes’ and employers retrenching from their commitments is certainly acting as a wake up call to the UK electorate. Either they are going to have to work a bit longer, demand bigger state pensions or ensure that private sector provision effectively bridges the gap. Inaction is not an option.
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