In October a high powered group of individuals led by Adair Turner, the former director of the Confederation of British Industry, reported on the state of pensions in the UK. It is an interim report. It will be another year before Adair Turner’s Pensions Commission tells us what we should do to change things. So I spoke to four top industry experts on pensions to ask for their solutions to what is widely regarded as a crisis in pensions.

The crisis is simply expressed. We are all living longer and saving less. Half of all adults under 30 are saving nothing for their retirement. Yet they can expect a retirement that is twice as long as when William Beveridge set the framework for today’s state pension in 1942. The traditional three answers to this crisis are that we must save more, work longer, or be poorer. But a fourth answer is also now being widely discussed. The state pension system – including the basic pension, SERPS (now called S2P) and the new means-tested Pension Credit – is a significant part of the income of most people retired people. For every pound paid out in company and private pensions, 91p is paid out in state pensions. So the fourth answer is to change and improve the state pension. And of course that is the only answer that will make any difference to the 11 million people who are already retired.

Make saving worthwhile
Despite government efforts we are saving less for our pensions just when we should be saving more. The Association of British Insurers says we are saving £27 billion a year too little. Many people say saving for our own pension at work should be compulsory. Steve Bee is the Head of Pension Strategy at life insurance company Scottish Life and is an informed and challenging commentator on pensions. Did he believe in that simple answer?

Steve Bee: "Let’s be clear what the problem is not. It is not that we are not saving enough. We have about £1.2 trillion saved up in company and personal pension savings. That is more than they have between them in the other 24 countries of the EU where it is about £600 billion altogether between 24 states. In the whole world, three quarters of the pension assets are owned in just three countries – the USA, Japan, and little old UK. The problem is that the pension wealth in Britain is owned by about half the population. So we are heading for a highly polarised retirement. But the Government looks at that wealth and assumes it is evenly spread and says it can therefore cut the state pension. Our state pension, with the exception of Greece, is the worst in Europe. And because it is meanstested you cannot say to everyone ‘you should save’. Because for some of them it won’t really be worthwhile. Every pound you save should make you a pound better off but with a big part of the state pension means-tested, it doesn’t.

And that is why I am absolutely against compulsion. Because you would be forcing some people to do something that is not worthwhile. There is a case for making it compulsory for an employer to contribute to a pension if an employee decides to join it. There are the new stakeholder pension schemes, which every employer has to offer, but four out of five have no members because the employer doesn’t have to contribute and so the employees don’t bother."

"Half of us are not saving for the future not because they don’t want to, but because the system doesn’t work for them. There are two things you could do to make it work. First you could say that any amount of pension savings would be invisible to the means test that determines how much pension credit you get. Just as you get tax relief when you pay in, you could get means-test relief when it pays out. So you would know, and advisors could say, that saving for a pension will be worthwhile.

Or the Government could change the rules so that when retire, you could look at the lump-sum you had saved and if that would buy you a pension that left you not much better off because of means-testing, then you could unwind the whole deal. Take the lumpsum as it was, minus the tax relief you had had, and spend it or give it away again without affecting your state pension. So we could advise people to save – it might make you better off, but it cannot make you worse off. And that would be a good thing."

Restore trust
It is not just the complex interaction with means tests or the need to buy an annuity that affects pension saving. Many people have lost their trust in financial services companies. Ros Altmann is an independent pensions adviser to Number 10 Downing Street and a Governor of the London School of Economics. She has become a powerful campaigner for people who have lost their company pension when their employer has gone bust and the pension scheme has been wound up.

Ros Altmann: "If you want people to trust you in the future I don’t see how you cannot compensate the people who trusted their company pension in the past, and have been let down. More than 65,000 people, up to 100,000 people, have lost some or all of their company pension. The government says ‘it has gone wrong, tough’. That’s not good enough. We have to restore confidence in pensions.

But there are broader issues. The state pension is not generous enough, the lowest of any developed country. By reducing the state pension you are passing the risk of pensions from the state, which can afford to bear it, to the corporate sector which cannot. Our companies are taking that risk and that cost and trying to compete internationally with other foreign companies where the state takes that risk and that cost from them."

"There is definitely a pensions crisis. But it is due to the fact that we are expecting pensions to do a job they can’t do. Because we are asking them to last much longer than the original idea of pensions called for. The result is that people who have saved for decades will suddenly realise they are not going to get what they have been saving for.

The answer to this has to be that we rethink the whole concept of retirement. It is a working life issue, not a retirement issue. There is a new phase of life, after fulltime work, with a lot more leisure but still contributing to your own and society’s economic welfare. In 2020 there will start to be a shortage of labour as the baby-boomers retire, or at least expect to. It is much healthier for those individuals and certainly much healthier for the economy if people don’t suddenly stop working. especially if they don’t have enough money to live on.

Thirty years ago if you had said the majority of mums would return to work, people would have laughed at you. They couldn’t do it, employers wouldn’t have them, they’d need all school holidays off and so on. Now most mums do return to work. It is taken for granted. So why not for 70 year olds too? And remember this is not the present generation who have done hard physical jobs for all their lives. By then most people won’t be so physically exhausted, the nature of work is changing and the nature of retirement must change too."

Work longer
Is Ros right? Will today’s young people have to work longer? whatever we save it will have to stretch over more years. Tom Ross, is a consulting actuary with Aon and past President of the Faculty of Actuaries. His job is to look into the future and tell pension funds what they need to set aside now to pay their pension promises in the future. What did he see as the cause of the crisis?

Tom Ross: "Words like ‘crisis’ can be a bit overused. In this case we have the luxury of time to sort things out. I am talking about allowing people to plan for things rather than forcing them to take action that is uncomfortable. Because the truth is people will have to work a bit longer. The length of time that people in their 60s can now expect to live compared to 30 years ago is significantly more. Three or four years extra may not sound a lot but on top of 15 years’ retirement it is a lot. And if you look at previous attempts by actuaries to extrapolate trends the forecasts have always undershot, Better lifestyles and medical advances have accelerated the improvement in life expectancy. The result is that we do not know how long we will live and that uncertainty has to be paid for. It makes the cost of guaranteeing a pension of a particular level more expensive. Of course investment performance plays a part but the uncertainty also puts up the cost. Then there is the extra political risk. When Mr Brown imposed tax on pension funds that cost money of course. But it also meant that companies reassessed the political risk, that put up the uncertainty and that put up the cost too."

"Well, there are some medical experts who are saying it is by no means obvious that succeeding generations will live even as long as we do now, we sit in front of computers, we eat junk food, we will die earlier. But other doctors say that people are not daft and when the penny drops behaviour will change and medical advances will kick in."

"I do it this way. If you are going to work for 30 years and retire for 30 years and you want to live on half your income – net of pension contributions – in retirement, the equation shows that you have to save a third of your income while you are in work. It is simple arithmetic – you can forget about growth and investment returns, they basically cover inflation and the rising standard of living. Now if a third is too much – and it is – you have to adjust the length of work and retirement. So it is inescapable arithmetic that a longer working life is going to be necessary. I think 65 has to go up over the next say 30 years to 70. In 2040 a 70 year old will be as fit as a 60 year old today. The government owes a responsibility that if there are extended working lives ways are found to make work possible and attractive to people. Men particularly need to be more flexible so that they are willing to ease out of employment, downgrade their job as their years advance. Working longer is going to happen, the arithmetic is there. It is important it happens in a way people can plan for."

Reform state pensions
When private pensions fail or are not enough, the state pension is supposed to be there to provide at least a basic income. Alison O’Connell is Director of the Pensions Policy Institute. It was set up in 2000 to provide objective and reliable information about pensions. Did the state pension work?

Alison O’Connell: "Among current pensioners about 20 per cent are in poverty. The poorest fifth live on around £100 a week and the richest fifth on nearer £400 a week. That is an enormous range and it magnifies the effect of earnings in life, gives most to people who have earned most. And disadvantages those with no or intermittent or low earnings. And that is mainly women. They tend to work part-time more than men do and they work more in industries without pensions. Even if there is a pension scheme they are less likely to pay into it, because they are working to boost their income for their children. In the state system you need to accumulate years of National Insurance contributions. Women tend either not to work or work in such a way that they don’t get credited into that system.

The new Pension Credit should put that right. It should top up income to £105 a week and give people a bit more if they have saved. But unfortunately take-up is only around 70 per cent, so 30 per cent are not getting what they should and are poorer than they should be. Even in future it will only reach 75 per cent so we have ‘hard-wired’ this failure into the system that one in four who should get this help won’t."

"I believe we must reform the state pension. Almost everyone gets it and for half now, and three out of four in future, the state pension system will be the most important determinant of their income in retirement. Now you can increase the state pension slowly, like the Conservatives and some think tanks propose. But that still excludes a lot of people. The other option is to change the system, which worked for the 1950s but does not work for the 21^st century. Recognise that there is a minimum that society thinks people in retirement should live on and pay that to everyone. You would need to organise the transition so that no-one lost. But it would give the most to those who needed it most. It works in New Zealand, where pensioner poverty is about 5 per cent compared to 20 per cent in the UK. We have worked out that you could pay around £105 to everyone over pension age for the same cost as the present system.

It would cost more in 30 to 50 years, not least because it would go up in line with earnings not prices. And of course there will be more people retiring. But if we do it now, before that ‘baby-boomer bulge born in the fifties retires in 2020 or thereabouts, we can do it. So it is urgent to do it now."

Consensus
There is an astonishing consensus building up for a better state pension, a longer and more flexible working life, a simpler way of saving up for our future, and restoring the trust in the value of doing so. Even those who say there is no crisis yet, believe there will be one if those polices are not implemented – and soon.

More information

Pensions Policy Institute

Ros Altmann

Steve Bee

The Pensions Commission

November 2004

e-mail Paul Lewis on paul@paullewis.co.uk