Britain may have been basking in the heat this July, but in the background there has also been a consistent deluge of negative stories about pensions which should have sent a chill down any pensions policy-maker’s spine.
Lowest since records began
The ONS delivered more bad news about pensions with the latest release of their Pension Trends data series, which is one of the UK’s most important sources of information about pensions. For anyone concerned about Britain’s pensions landscape, it made for grim reading.
In 2011 (the latest year for which this data is available) the number of people actively contributing to occupational (workplace) pension schemes had fallen to 8.2 million – the lowest level since the 1950s. Two-thirds of these are in the public sector, while almost 60% of people who belong to defined benefit pension (or final salary) schemes are in schemes which are closed to new members (meaning younger employees are losing out disproportionately). Overall, barely a quarter (28%) of the nation’s employees are in defined benefit occupational pension schemes, having fallen from nearly half (46%) fifteen years ago.
The decline in private pension schemes, especially those operating the more generous defined benefit model, represents nothing less than a time bomb of future pensioner poverty, as many of these people will struggle to provide a decent income for themselves when they reach retirement. Given that this data is already two years out of data – and that there is only one direction of travel – the situation is now almost certain to be even bleaker than it was then.
“The reforms will reduce the state pension income they can expect to get”
Also in July, more bad news was delivered by a new piece of research by the Institute of Fiscal Studies (IFS) which showed that today’s young people are set to be the big losers from the government’s major reform of introducing the single-tier state pension.
Compared to the current system in which the state pension can be topped up with the second state pension, which is means-tested, the government’s reform will simplify matters by instituting a single, flat-rate, pension of around £146 per week, which will be paid to everyone.
The IFS has done some in-depth modelling of which types of people are likely to be winners and losers under this change, which has shown that people who are close to retirement today are likely to benefit from having higher pension incomes, while those born after the 1980s are set to receive lower incomes.
According to their findings, because of the loss of the means-tested element, a low-earner born in 1986 is likely to receive almost £1,000 per year less after they retire, while the figure could be £2,300 less per year for someone of the same age who spends their career as a high earner.
The reason why the winners and losers are arranged like this is because the new pension will be more than could have been expected by those people close to retirement and who wouldn’t have qualified for much means-tested top up, but for someone who might have done very well under the present system the new system is less generous.
One of the authors of this piece of research, Soumaya Keynes, had the following to say about this policy’s impacts on young people:
“The single-tier pension proposals will boost the state pension entitlements of some of those who are close to state pension age, particularly those who have spent time caring for children or who had long periods of self-employment. However, for most of those now in their 20s and 30s, although these reforms should make it easier for people to predict how much state pension income they will get, the reforms will also reduce the state pension income that they can expect to get. They will need to save more privately for their retirement to make up for this.”
“Highly uncertain” costs
Just to emphasise the sense of crisis facing pensions in Britain, the National Audit Office (NAO) also chose July to make a public warning about the likely impacts of people not saving enough money for retirement.
The NAO warned that nearly 40% of the working age population, 10.7 million people, are currently not saving enough to have the income which they expect to enjoy when they retire. Returning to the time bomb theme, they warn that this risks placing a huge burden on future governments because of the danger that policy interventions such as the National Employment Savings Trust (NEST) will not do enough to minimise the state’s liability for helping future pensioners who haven’t got enough income.
They argue that Britain needs a joined-up policy approach linking different areas of government if we want to deal with this issue more effectively. The OBR estimates that spending on pensions and pensioner benefits alone will be costing us nearly 10% of GDP in 50 year’s time (up from 5.5% in 1990), but the NAO argued that in reality these costs are “highly uncertain”, given that no-one really knows how the pensions landscape will shift between now and then.