UK pensions report

What does 2008 hold for pensions in the UK? Malcolm Small reports

As we look around in the UK, we see a pensions landscape if not in disarray, then at least in transition. The UK is widely acknowledged to have been the pioneer in good, workplace based, pension provision. After the experiences of the inter-war years and the arrival of the “welfare state” it is perhaps no surprise that a key question in any employment choice was “what is the pension like?”. People believed themselves likely to work for one, or perhaps two, employers in their entire working lives. I have in my possession a wrist watch made in 1961, which was presented to a railway employee in appreciation of 45 years service that year. That means the lucky recipient would have started employment in 1916 and would still have had at least four years service to go before retirement. How employment patterns have changed. Very few, if any, of us would even think about the possibility of working for just one employer for that length of time.

And yet, it was precisely that length of service which gave at least the possibility of building up a worthwhile pension – and railway pensions were better than most.

It is hard to appreciate the scale of the decline in occupational pension provision in the UK over the last few decades. In 1967, at the peak, there were over 12 million private sector workers actively enrolled in pension schemes, almost entirely Defined Benefit. According to the Association of Consulting Actuaries, there are now less than 900,000, with four out of five schemes closed to new entrants. Active membership of schemes of all types has declined from around 97,000 in 2004 to just 78,000 in 2006, indicating a continuing and rapid erosion of the sector, at a time when private pension provision in Europe is generally on the rise.

So, how does the UK population see pension provision going forward? After all, they still have the choice as to whether they engage with pensions at all, as they do not have to join a pensions scheme, even where it is on offer – and we know that between 20% and 40% do not, in many cases.

The Pension Report 2007 studied the attitudes and requirements of, predominantly, ABC1 consumers in the 45 plus age group – in other words, those you would normally expect to be interested in, and engaged with, retirement planning.
Some startling findings emerged.

First, confidence in all forms of pension, whether provided by the state, employers or private pension providers, was extremely low. Personal pension “mis-selling”, the near collapse of Equitable Life, failures of occupational pension schemes and effective reductions in non means-tested state benefits have all taken their toll on consumer confidence. Whereas ten years ago, employers were trusted to provide pensions, now, that trust has gone.

Moreover, the gulf between private sector pensions (now, usually, money purchase) and the defined benefit schemes on offer in the public sector is becoming ever more evident to the UK population. The focus groups showed the growing resentment of the former towards the latter groups as regards both the security of their employment and their pension rights, which are mostly, at best, only notionally funded, leaving the retirement bill to be picked up by all tax payers. This was not recognised widely even a few years back.

Second, and more optimistically, consumers do recognise the issue of saving for retirement. They are clear in their own minds that they cannot rely on anyone else, even the state, to tackle the problem and that they must therefore do it for themselves. However, given the scale of the amount that needs to be set aside for any kind of “comfortable” retirement, they feel depressed and intimidated by the task, given the other commitments in their lives. These commitments are mounting, particularly with the breakdown of traditional life stages. There was plenty of evidence of the sample expecting to be funding depend-ants and mortgages well past their expected retirement age, as second families, or even just later families, and second main residence purchases following divorce.

Third, they are devising strategies for retirement income provision. The problem is that those strategies tend to involve either working into retirement (a welcome development, if personal health is good, which for many, it is not) or relying on property investments of some type. Those investments may be buy-to-let or equity in the main residence, but with property evidently on the down-swing of the cycle, this route is potentially much more limiting.

Consumers do, however, appear to be using alternative investment vehicles to traditional pensions, with around £250bn in insured investment bonds and around £300bn in Individual Savings Accounts. To put this into perspective, the sum invested in all UK pension funds is around £1600bn, with £400bn in occupational defined contribution schemes – so the numbers outside pension plans are not insignificant.

Fourth, there is a strong desire for “control” of pension fund monies. Those that have control, through
a Self Invested Personal Pension (SIPP) for example, showed much more interest in the performance of their pension fund.

Overall, however, consumers expressed considerable dissatisfaction with the current structure of pensions in the UK. Tax relieved contributions were scarcely recognised, unprompted, as a feature and were regarded only marginally as attractive compared with the requirement to lock money away until retirement. Particular venom was reserved for the requirement to purchase an annuity to provide an income for life – the “quid pro quo” for tax relief – with one respondent suggesting that an annuity was “legalised robbery”. The inability to pass pension assets down the generations, even with a heavy tax charge, is highly unattractive.

So, perhaps it is no surprise that consumers seem only interested in investing in a pension as a last resort. The current system of pensions in the UK, described above, dates from 1956, just a few years before the watch I own was presented to the lucky railway worker.

People’s lives are completely different in 2008 and it may be time for a completely fresh look at the structure of UK pensions.

This is important, because with the arrival of soft compulsion with Personal Accounts in 2012, people will still be able to opt out of contributing to them.

If they find the basic proposition unattractive, they probably will “opt out”, and they may well be the poorer for it in old age. This is an outcome that neither policy makers nor the pensions industry will want.

WRITTEN BY MALCOLM SMALL, DIRECTOR of PORTFOLIO and RETIREMENT PLANNING, TAX INCENTIVISED SAVINGS ASSOCIATION