Friday, 2 December 2011

How to Diffuse The Pensions Timebomb

Plans to increase scheme retirement ages and member contribution levels, coupled with changes in how pension income is calculated and increased in retirement, have caused outcry amongst those affected and their respective trade unions.

In his Autumn Statement this week, Chancellor George Osborne announced that the state pension age will increase to 67 by 2026, eight years earlier than planned and commentators expect the further increase to age 68, scheduled for 2046, to be brought forward by a similar term.

What has driven the government to take such measures? The answer lies in demographic changes since World War 2. An ageing population which, thanks to medical advances, is living longer, has created a pensions time bomb which left unchecked, could prove to be a disastrous financial burden on the state and ultimately, the taxpayer.

When the state pension was introduced in 1908, it was means-tested and only available to those aged 70 or over, with no criminal record and of proven sobriety. Life expectancy meant that the duration of state pension payments was measured in months and years rather than decades, as it is now. Funding came from the national insurance contributions paid by a labour force which outnumbered pensioners by a ratio of 9 to 1. Nowadays, that ratio is nearer 2 to 1.

Increased life expectancy may be good news for the individual, but not for pension provision. In 2001, a 65-year-old male in Northern Ireland could expect to live a further 15.7 years. Today that figure has risen to 17.4 years, meaning that the state pension, private pensions and workplace pensions have experienced an increase in costs of 10% in only 10 years simply to maintain the same level of income. Newborns now have a 33% chance of living to 100 years old and government estimates in April indicated that 11m people living in the UK today will reach the age of 100.

Simply put, the sums do not add up. The cost of providing every £1,000pa of state or public sector pension has risen from £8,000 in the 1990s to nearer £40,000 today. These are funded by taxes and national insurance contributions, which may have reduced since the credit crunch but were insufficient before then. The government is faced with a stark choice - to adjust the state and public sector benefits, including contributions levels paid by members or to pass the increasing burden to the taxpayer in the form of higher taxes and national insurance contribution rates.

We may have to accept working longer, paying more into our pension arrangements and possibly having to settle for less, when compared to where we are now. But it does not have to be this way. Most people simply do not save enough for retirement. Many have no pension provision whatsoever and wrongly assume that paying the bare minimum will generate sufficient retirement income or failing that, the state will provide. It won't! The answer, whether we like it or not, is to save more and start as soon as possible for the retirement we desire and just maybe, we can diffuse the pension time bomb!

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