Ros Altmann: As millions face poverty without a pension, we must rethink the lottery of paying for retirement

In an effort to increase the number of workers with retirement savings, reform is on the way. From next year, all workers will be automatically enrolled either into an employer pension scheme, or into NEST – the National Employment Savings Trust – which the Government is setting up to ensure a “low cost” pension scheme is available to all.

But, although they will be enrolled into a scheme, workers will be able to opt out. Many observers believe that millions of them will do just that. Confidence in pensions is shot to pieces.

Many of those coming up for retirement are finding that poor investment returns and soaring annuity costs have left them with much less pension income than they expected.

Disappointment with pensions and numerous scandals – together with seemingly impenetrable pension complexity – have put people off contributing and, of course, most of us prefer to spend our money today, rather than locking it into a pension fund which we cannot touch for decades.

Addressing this situation is urgent. Failing to do so risks rising poverty, social unrest and a society over-burdened by demands of old age. We have a rapidly ageing population, with the first baby boomer reaching age 65 this year and many millions more following them in years to come.

In addition, the current pensioner population is living much longer than previous generations, and the numbers of older people are reaching record highs.

This should be considered fantastic news, but if people are just living longer in penury, the outcome will not be positive. The current crisis means most people will not have enough pension income for a decent lifestyle, even in the early years of their retirement.

Of course part of the solution will have to entail people working longer – preferably part-time, in order to boost their income, but it is absolutely vital that we re invigorate long-term savings. So what can we do?

The word “pension” has become so negative that people often don’t believe there is value in paying into one.

How about abolishing the word “pension” from all private later-life savings products?

I have long advocated renaming private pensions so that the word “pension” should only be used for the money paid to you by the Government in retirement.

Private “pensions” would then be called something new.

After all, the money in a pension fund is just your savings, but a particular type of savings – some of which may come also from your employer – which is earmarked to support you in later life.

So let’s have some new thinking. This money is savings for your own future and should be called something new. How about “LifeSaver”, or “Later Life Lolly”, or “MyFuture Fund”?

A new name may help change people’s attitudes and clarify that these are our own savings, to supplement a state “pension” that will not be enough to provide a very comfortable lifestyle.

Changing the name may be a start, but we also need new incentives too.

How about introducing a lottery with retirement savings? Everyone contributing could be entered for a draw to win £1m each month. The cost relative to current spending on pensions marketing would be tiny, but offering savers the potential of something in it for them today, not just in the distant future, could catch their imagination.

It is understandable that people are reluctant to save and just lecturing them about what they should be doing is not enough. To rediscover the savings ethic, people need better encouragement.

If they thought they might win £1m, maybe they would feel better about the idea. Many people play the lottery each week, but their pounds are gone, whereas with a retirement savings account, the money should still be there for them – and they might win a million.

We know that people are not saving enough for their future – and that the state cannot afford to be very generous to increasing numbers of older citizens – especially as the number of younger taxpayers will be falling as the baby boomers retire. Therefore we have to rethink.

It is fantastic news that so many of us can expect to live much longer, but we must wake up to the financial realities that this entails.

We can no longer rely on an employer or the state or the stock market to deliver ever-increasing pensions that will last for ever-lengthening retirement periods.

Perhaps re-naming private pensions and offering lottery prizes will help to make pensions more attractive – and maybe even exciting. Now that would really make a change.

Dr Ros Altmann is director-general of the Saga Group. She is a pensions and economics policy expert and former investment banker, who has advised Tony Blair.