By Annie Hayes, HRZone Editor

By 2050 if I have escaped accident, disease and terrorism I will be one of the predicted 48% of people over the age of 65, this may seem unremarkable in itself but when you compare it to today’s pool of retirees of which there are 28% in the population you can start to see that at the root of the pensions time bomb is increasing life expectancy and lower birth rates; Editor’s Comment examines the options and presents the views of HRZone members.

The facts

This week a report by the chairman of the Pensions Commission and former Director-General of the CBI, Adair Turner revealed that Britain faces a pension black hole.

As life expectancy rises and the birth rate goes down we face a situation in which the proportion of retirees to workers is top heavy. While this places a growing burden on the state, company pension schemes are becoming less generous and final salary pensions are being slashed as businesses recognise that people are living too long to make them economically viable.

Stakeholder pensions have also seriously flopped. The Turner report found that just 4% of small employers pay any cash into these schemes.

So the long and short of it is there just isn’t enough money in the pot, to be exact we should be saving £57 billion more a year then we currently are towards retirement funds.

Turner has presented three options: raise taxes, save more or work longer.

Option 1: Pay more tax

Conveniently for Labour the final recommendations of the Turner report are not due to be published until after the election. Certainly Blair’s government will be running scared that a commitment to any of these actions could mean a lost election. Raising taxes to plug the pension shortfall could be the downfall of Blair just as the poll tax was the final nail in the coffin for Thatcher.

John Denham, former pensions minister and current chairman of the Commons home affairs committee told Channel 4 News:

“The report hadn’t even left the presses, and tax rises were ruled out by the Chancellor. The Tories are saying also you don’t need tax rises; we can do it all through government savings.

“So one of Turner’s key proposals and the one that actually makes most sense to most people has already died in the political quick sands. That makes me pessimistic we will not rise to the challenge.”

Denham argued that for most people an extra element of tax or national insurance would be “the most cost-effective way of looking after their own parents, themselves and their children.”

Peter Duckitt, HRZone member agrees. He said that increasing National Insurance contributions to a level where everyone can be assured of a decent level of state pension presents the best option.

“Given the recent problems caused by low equity prices, pension miss-selling and pension funds problems, surely the best way of protecting the majority of people in society is for the State to take more control.”

The government’s spending plans are intended to keep the proportion of GDP that is spent on pensioners stable, rising from 9.1% to a high of 10.8% in 2050.

A state controlled system will mean less expendable income for many and limits pension choice but the alternative is also stark and can Britons be relied upon to save?

Option 2: Save more

The second option is that we simply save more.

Turner points to four barriers to increased private savings:

1. People do not make rational decisions about pensions
2. The cost of financial advice makes decisions about savings expensive for low-income workers
3. The pensions system is excessively complex which leads to ‘confusion and mistrust’
4. The Government’s reliance on means-testing acts as a disincentive to saving.

The picture looks bleak. What’s more existing savings vehicles are failing. Labour’s Stakeholder Pensions that were introduced in 2001 and were designed to bolster private saving for those on lower incomes have done little to encourage people to save.

While final salary schemes have fallen by 60% since 1995 and the Turner report says that those saving in defined contributions schemes are not saving enough.

Duckitt said: “There is an increasing number of self-employed who do not have the advantages of an employer’s pension contribution. Even those employed have different levels of contribution dependent upon their employer’s ability to pay. Small to medium sized businesses employ the majority of people and are the least able to afford occupational pension schemes.”

Barry Rees, Director of People Programmes agrees:
“There is more action the Government could take to encourage personal savings for pensions:

• Allow greater flexibility on what people can do with their pension pot rather than just buy an annuity (such as invest a percentage of it in commercial or residential property to get rental income)




• Increase the amount of cash people can put into ISA’s, or even create Pension ISA’s that give additional tax breaks over and above standard ISA’s, and in addition to the limits for standard pension plans




• Introduce corporation tax incentives on company contributions to pension plans.”

While Iain Young, Head of Human Resources at Cofathec Heatsave Ltd pointed out the political barriers to saving: “Can I suggest a fourth option the Government stop raiding people savings and allow them to save and pass on to their families what they have saved.”

So how much should we be saving and can we afford it?

Anne Ashworth of the Times suggests that as a rule of thumb people should be contributing a percentage of salary equivalent to half your age. This means that, at 40, you should be putting aside 20% of your earnings.

She goes onto say that if you delay saving until the age of 40 you need to set aside £490 a month to retire with a pension pot of £330,202 which would give you an annual income of £24,600. Start as late as 50 and the monthly investment rises to £1,152.

The reality is though that with student debts rising, many young people are prevented from saving for retirement when they start working.

Jeff Randall, business editor of the BBC said the level of personal debt in the UK was ‘unprecedented’. A combination of low interest rates together with the mounting spending of a ‘must have’ society have meant that the average student debt for graduates has amounted to a whopping £11,830, according to the Push Guides.

Randall said such debts mean that corporate pension schemes would increase in importance in attracting employees.

While the young fight the problem of debt, carers are also missing out on maximising their pensions contributions. At the bottom of the pensions pile are often women who take time out to have children frequently leaving huge holes in their pensions contributions.

Ros Hampson at the Maternity Alliance told HRZone: “Women get some national insurance credit for the time they are getting child benefit and not working. This helps to protect their entitlement to state retirement pension.

“However, women can miss out on occupational pension savings. Although they are entitled to accrue benefits including pension contributions during Ordinary Maternity Leave, this stops if they take Additional Maternity Leave (which is a further 6-month period) or parental leave.”

Many women often rely on their husband’s pensions but warns Elizabeth Watchorn, a social worker from Hertfordshire divorce can bring the most carefully executed plans to a sharp halt. Speaking to the Times she said:

“A wife’s income is often seen as a couple’s spending money, while the husband puts more of his money into his pension, for both of you. But then you get divorced.”

HRZone member, Gillian Tinson Head of HR for City Projects says that despite these concerns saving is still the best option: “People need to take personal responsibility for their finances provided plenty advice and information is available.”

Option 3: Work longer

Of course working longer is another option.

If you dreamt of retiring at 55, however, you might have to think again because on average you will only have worked for 30 years and might still have 30 years left for which to pay for.

Average male life expectancy at age 65 has increased from 12.0 years in 1950 to an estimated 19.0 today. The Government Actuary’s Department’s 2002-based principal projection suggests that it will rise to 21.7 by 2050.

If average male life expectancy at age 65 continued to rise at the 1980-2000 trend rate it would reach 27.7 by 2050.

Working beyond retirement age though has not been found to be a popular option by Office Angels who conducted a survey of 1500 office workers aged between 18-65.

The findings report that 52% of respondents are against the idea of working into old age and beyond 65.

Of course the other obstacle that lies in the path of this option is age discrimination. Despite regulations which are due to come into force in 2006 outlawing age discrimination employees are still finding it a barrier to getting work.

Duckitt said: “We all become old and none of us know whether we will be fit; or be able; or allowed to work to retirement age. It is ridiculous to talk of working to age 70 when people over age 50 find it difficult to find employment because of age discrimination.”

A survey by Spring Personnel supports these claims. It said that 63% of UK companies are not planning to actively recruit from the over 50 age group.

Spring Group CEO, Richard Barfield said: “How is the UK Government going to reach its goal of keeping people in employment until they are 70 when the majority of companies are not planning to employ people over 50? Unless employers can be persuaded of the benefits of using older people in the workforce then the pensions black hole of £57bn is going to get bigger.”

Combining the options

Keith Luxon, HR Policy and Reward Director at the Laurel Pub Company told HRZone that he would be opting for a combination of the three solutions:

“To retire at 65 and expect to live for another 20+ years on your savings is unrealistic therefore a phased programme of later retirement is inevitable.

“In addition we will all have to contribute more taxes as the balance between those economically active and those dependent changes, the consequences of the ‘baby boomers’ having fewer children in the 60’s and 70’s and 80’s means that there will be fewer people to support these same baby boomers in retirement.”

Luxon says that maintaining the status quo means that taxes will have to rise or benefits fall and individuals will have to take more responsibility for their retirement by genuine savings to supplement the state pension.

Concluding he added: “The real challenge however as I see it is to get any political consensus around these issues. This should not be a party political issue as we need to make some hard decisions now that will have no financial payback for maybe 20-30 years. Therefore the work of the pensions commission needs to be embraced and debated widely and a genuine consensus needs to be found.”

The pensions issue is not one that will go away and I would agree with Luxon that a combination of all three options seems the only way forward. We await the final findings of the Turner report and hope that in the meantime the coffers in the pot don’t get spent all at once.