Scale of pensions crisis is worse than originally feared ñ Policy Exchange

Read the full report at http://www.policyexchange.org.uk/images/libimages/345.pdf

Read the executive summary at http://www.policyexchange.org.uk/images/libimages/346.pdf

A new report for the centre-rightís leading thinktank Policy Exchange ëQuelling the Pensions Storm: Lessons from the pastí has uncovered the true scale of the pensions crisis. Written by Nicholas Hillman, a Policy Exchange Fellow and formerly a member of the Joint Working Group which advises the Government on pensions, it makes disturbing reading for those who have not made adequate provision for their sunset years.

Britain used to have an enviable reputation for high-quality pension provision and, despite some testing times, many of the underlying strengths persist. The report finds, however, that the Government lacks ambition in its pension reforms, and argues that it is possible to provide future pensioners with a more secure and prosperous retirement than will occur under the Governmentís reforms.

The key findings:

private occupational pensions have been in decline for decades - the high-point of membership was 1967 only 15% (3.4m) of private sector employees are now in defined benefit schemes ñ and only 4% (0.9m) are in schemes still open to new members fewer than 1 in 4 (24%) UK employees has a private pension as their main addition to the basic State Pension ñ down from 39% in 1991/2 Group Personal Pensions have contributions that are around one-third of those for final salary schemes (9.9% versus 28.7%) public sector pensions are growing in size and cost ñ the annual charge to the taxpayer is set to rise by 33% (from 1.5% of GDP to over 2%) by the 2030s the State Pension system, which is already the most complicated in the world, will become even more complicated in the future serial changes to the state pensions system have had no real impact. Were the current system to be maintained, a median earner retiring in 2060 would receive an income from the basic State Pension and the State Second Pension combined of around 20% of their previous income, roughly the same rate at which the state pension was paid when it was introduced in 1948.

In the foreword to the report former Head of UK Pensions at Unilever Chris Lewin, who led a major review into pensions for the Government in 2007, writes: ìMillions of people are not saving enough and will have barely enough to live on in years to come ÖWe therefore need a strategy in which everyone has the opportunity to look forward to their retirement with confidence and in which they have the financial ability to enjoy the final phase of lifeÖThere is currently far too much means testing: it is degrading, expensive to administer, and a disincentive to save. Debating these complex issues now gives us the best chance of finding optimal and sustainable solutions.î

The principal author of the report, Nicholas Hillman commented on the findings:

ìOver-regulation, rising longevity and extra costs have conspired to produce the perfect storm in pensions.

ìSome of the Governmentís reforms offer an improvement on the status quo. But they will make little difference to pensionersí incomes overall. There is next to nothing to encourage employers to provide generous pensions and personal accounts are a disaster waiting to happen because the implementation risks are so enormous. On top of this, the State Pension system will soon become even more complicated.

ìQuelling the storm will need three changes. First, we need braver deregulation for private occupational pensions, as well as lower costs for public sector schemes. Secondly, instead of spending four years designing an entirely new system of personal accounts, employees should be automatically enrolled into existing products, such as stakeholder pensions. Thirdly, we should recognise that earnings-related state pensions do not work. A Single-Tier State Pension would be much more comprehensible than the current Basic State Pension and State Second Pension.

ìToo many working-age people face poverty in their retirement. If we do not make changes now, this situation will continue for decades to come. The window for opportunity is small.î