21/10/2010
By Francesca Fabrizi
UK pensions hit by Government’s dramatic cuts
An increase in employee contributions to public sector pensions coupled with a rise in the State Pension Age were just two of the pension-related issues to come out of the UK Government’s Comprehensive Spending Review this week.
The UK Treasury confirmed an average increase to public sector member contributions of 3% of earnings. This will equate to a £1.8 billion increase which, said consultants Towers Watson, should only be seen as a "temporary solution to the challenge of reforming public sector pensions".
Rash Bhabra, head of corporate consulting at Towers Watson, said: "Raising an extra £1.8 billion in employee contributions will help reduce Government borrowing in the short-term. On its own, however, it won't make any difference to how much future generations of taxpayers have to pay for the pensions being promised now. This should be seen as a short-term sticking plaster pending changes to the terms on which pensions are promised.”
Joanne Segars, chief executive of the UK’s National Association of Pension Funds (NAPF), commented that while there was a strong case for increasing staff contributions, the lower paid must not be priced out of their pensions. She added: "We are glad that the Government recognises this, and that it agrees public sector pensions must remain good quality.This must not become a race to the bottom to offer the worst pension. Any hike in contributions must be gradually phased in, with low income workers protected to minimise opt-out rates from pensions.”
The Treasury also announced that the State Pension Age would rise to 66 by 2020, which was seen by some commentators as a major blow to women while others saw it as necessary, if unpopular, move.
NAPF's Segars commented: “Increases in the State Pension Age are inevitable, but they must be handled fairly. People need time to plan and adapt. These changes will have a particular impact on women, especially those in their late 50s, who may have to review their retirement plans. The trade-off for a later retirement must be a better state pension, particularly as the UK’s is the worst in Europe."
Tom McPhail, head of pensions research at Hargreaves Lansdown warned that this would come as a big disappointment to women in their mid 50s who have only just got used to a retirement age of 65, now having to hang on until 66 for their state pension. “We knew that retirement ages needed to rise but it still won’t be a popular move. If you want to retire earlier, then you’ll need to boost your private savings.’
Mercer, however, supported the principle of raising the State Pension Age claiming it was a “sensible response to increasing longevity".
Deborah Cooper, partner at Mercer, added: "Acceleration of the increase will affect women and those in low income groups the most, but it is a pragmatic decision given the difficult choices the government is having to make.”
The government also confirmed that auto-enrolment and NEST would go ahead. For further details on this aspect of the Review, please visit www.pensionsage.com
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