Staving off a pension cataclysmic landslide
It was surprising how little consideration was given in any of the main political parties’ manifestos on saving for retirement. The Lib Dems raised the issue of a flat rate of tax relief on pension contributions. Labour wants to keep the status quo on the triple lock on state pensions and review the state pension age. Last but no least the Conservative’s want to make auto enrolment available to the self employed, remove the 2.5% floor on the state pension triple lock and to give further consideration to changes to state pension age to reflect increases in longevity. That said, by the time this goes online the Conservatives may have changed their mind on any or all of these points.
What is scary is that all parties seem to be burying their heads in the sand and ignoring that a pension cataclysmic landslide is descending upon us and merely chipping away at the edges is going to make no difference to the damage done which may not be able to be repaired.
The World Economic Forum (WEF) has warned that if no action is taken now to address longevity risk it predicts the UK pension’s savings deficit will grow by 4% annually on average, from £6.2trn today to £25.5trn in 2050. Their research looked at all forms of pension saving across defined benefit and defined contribution, including private, state, workplace and personal pensions.
Michael Drexler, head of financial and infrastructure systems at WEF said “The anticipated increase in longevity and resulting ageing populations is the financial equivalent of climate change. We must address it now or accept that its adverse consequences will haunt future generations, putting an impossible strain on our children and grandchildren”.
The WEF view is that the UK should move now to increase the state pension age to at least 70 by 2050. This is far earlier than that recommended by John Cridland in his independent review published in March which was that the state pension age should hit 68 by 2037, and then increase by one year per decade reaching 70 in 2057.
The move to align the state pension with life expectancy is of course only one part of the solution as there are other major issues of concern.
JLT Employee Benefits estimate that as at April the aggregate deficit for all UK private sector DB schemes was £182bn out of a total liability of £1.8trn. Many employers are trying to reduce the liability but some unfortunately want to do so not by increasing funding but taking actions such as stopping accruals on closed schemes which will have a devastating effect on members’ income when they retire.
The problems in the private sector pales into insignificance if you consider the public sector unfunded pension liability which in the region of 1.3trn. How or even if this can ever be brought under control will have a major impact on future generations who will have to continue to fund this liability long after those who benefited have died.
A long term strategy has to be put in place. Steps such as ensuring the private sector and government better manage the deficits they have allowed to build up. The need to encourage people to save more for retirement is paramount, even if it has to be made compulsory. Perhaps, though the most controversial, is to make the state pension means tested. All these points and more have to be considered sooner rather than later. The likelihood however is that further deferral of these crucial but unpopular decisions will be deferred.
All this reminded me that in the early 1970’s I used to stay with my grandparents over the holidays. I have to say the only downside of these visits were pension day. I would be dragged out of bed at some ungodly hour, hauled to the town centre to queue outside the post office for what felt like hours come rain or shine. It was quite a social event with the main topic of conversation being who was missing from the long queue and who was out of their normal spot. The only reason I could think of for such irrational behaviour was that if you were at the end of the queue there was the possibility that the post office would have run out of the money by the time you got served. I wonder if in another 30 years time, if no action is taken, that might actually be the case.
This blog first appeared in Professional Adviser