Sponsored by
Choice of evils as the world gets older...

Published on Tuesday 12 October 2004 22:54

With a complicated and woefully inadequate system, how does Britain edge back from the precipice of the pensions crisis outlined yesterday? Maggie Stratton reports.

THE Pensions Commission will not recommend for another year solutions to the huge problems it laid bare yesterday. It made one thing very clear, however – inaction is not an option.

As life expectancy increases rapidly and shows no signs of slowing and low birth rates area forecast, the percentage of people over 65 in Britain is set to double by 2050.

It's a bleak choice, says the commission – pensioners get poorer, taxes and national insurance contributions go up, savings rise, or we work longer before retiring.

"There are no alternatives to these four choices. If we do not raise tax rates, savings rates or average retirement ages, pensioners will on average suffer about a 30 per cent decline in their incomes relative to average incomes between now and 2035," the report said.

"If we want pensioners to be on average as well off as today, but keep retirement ages totally unchanged, the percentage of Gross Domestic Product (GDP) transferred to normal retirement-age pensioners would have to rise from 9.9 per cent today to 17.5 per cent in 2050," it added.

The cost of keeping the retirement age as it is and achieving the increase in the percentage of GDP required mean that either state spending on pensioners must rise by 57bn, or private funded pensions must more than treble.

To keep pensioners as well off relatively without increasing taxes or savings rates, would, the report said, mean raising the average retirement age of men from 64 to 70 and of women from 62 to 70.

Confused by or wary of private pensions, some have considered whether housing assets could come to their rescue in retirement.

The Pensions Commission warned it was not a sufficient solution to the problem.

Certainly housing assets are bigger and many home-owners may inherit property that will help fund their later lives.

But uncertainty lingers over future housing prices, and other claims, like long-term care, loom over property assets. In addition, those with least pension rights tend to have least housing wealth.

One of the more controversial solutions mentioned by the commission was that of compulsion – effectively forcing people to save.

Leeds corporate benefits consultant Ken Soper, from Baker Tilly Financial Services, believes some element of compulsory pensions savings will be needed to help tackle the pensions crisis.

"We have got to do something relatively quickly. The ideal route is a process of education and advice but you have to engender a sea change in the mindset of the average person looking on and thinking what is this all about. Often the short, sharp solution is the answer," he said.

"Any form of compulsory pension provision should be a partnership between employer and employee. No one likes someone else telling them how to spend their money no matter how noble or necessary the cause. It will be equally unpopular on both sides of the fence.

"From the employers' perspective it will be seen as an additional cost of employment, and the employees want to be able to spend money in the short term. Compulsion would be one way to address the problem relatively expediently."

Pensions expert Dr John Hamill, of Leeds Metropolitan University's School of Social Sciences, agreed that drastic action was necessary, but ultimately unlikely.

He said: "I think it will take a great deal of courage to introduce radical changes in the pensions system. But the space for making political decisions to solve the crisis is very, very limited."

"To increase income tax would be a very difficult thing to do given the Government's commitment to capping income tax and public expenditure. Imposing compulsion on employers would also be a very difficult thing to do. They have just about swallowed the minimum wage."

The problems of the pensions system lie in its complexity but also in its historic foundations, Dr Hamill said.

"When the state pension started in 1908 it was deliberately designed at a minimum level. It was never designed to deliver a comfortable retirement, in fact it was designed so low to encourage people to save privately."

The answer to the crisis seems to fall heavily, therefore, with the individual.

Ken Soper's advice to those without pensions is "Do something and do it now".

He said: "Don't fall into the trap of saying, I'm young and there is plenty of time for me to do this when this commitment or that is out of the way. Suddenly you will be 35 and the cost will have rocketed."

Pensions research manager Tom McPhail said: "If your employer offers a company pension scheme – join it. There is a surprising number of people who do not join.

"In some cases, people do not sign up because to do so means putting their own money in as well and they say they cannot afford to do so. But it is well worth making that investment."

Other – more radical – proposals to alleviate the pension problem include increasing the birth rate to offset the number of elderly people.

The fertility rate in England and Wales currently stands at 1.7 children – a figure that should be increased to 2.07 children per woman to stabilise the population, the report said.

One final solution put forward is the controversial issue of immigration.

"It is an interesting consideration," said Mr McPhail. "There is an option where retired people can move to countries which have a lower cost of living while younger healthy workers emigrate here."