Some consider so much negative news about pensions depressing. In August, the Workplace Retirement Income Commission report was published by Lord John McFall, which led to mentions of millions facing a bleak old age because they are falling through the cracks of private pension provision.
That phrase ‘bleak old age’ revived memories of research from the mid 80s that, not surprisingly, found that the word retirement conveyed opposite meanings depending on socio-economic class. To the affluent, retirement was a positive word; to declare yourself retired was a badge of honour, because retirement was viewed as a period of life to enjoy and have the financial means to do so.
For those on low incomes retirement was a negative word. The prospect of it was met with dread and fear, posing financial concerns. Socially, self esteem plummeted due to a feeling that usefulness was vastly decreased without having a job; in other words, they could only look forward to a bleak old age.
In the past couple of decades the number that might have viewed retirement as positive was arguably at its highest. Retirees in this era may well have enjoyed the benefits of a long working career, predominantly with one company and accompanied by a good final salary scheme. It looked very much like a golden age for new pensioners.
Furthermore, Government data show that pensioner poverty has fallen over the past three decades. In 1989, 36% of pensioners had income below the relative poverty line compared to 16% in 2009. Can this ratio be maintained, let alone improved further?
A potential problem is that, if today’s generation of workers is viewing the current phalanx of golden age retirees as the benchmark for their own retirement years, there could be a serious mismatch in expectations.
There does need to be a wake up call. The dynamics of retirement have shifted massively, primarily through longevity and the demise of final salary pension schemes. The reality of any solution for avoiding a bleak old age rests with the basic triad of options; save more, work longer and adjust expectations.
There are, of course, steps being taken. A universal State pension should provide a good solid foundation to build on and it will be interesting to see just what effect auto-enrolment will have.
It can be anticipated that the numbers of individuals with pension provision will increase but commentators have expressed fears that NEST, with its final minimum contribution level set at 8%, will have a dumbing down effect and breed false expectations that contributing at this low level will provide retirees sufficiently.
Countdown conundrum
The conundrum is that even at the NEST contribution levels, which will require individuals to contribute 4%, it is predicted that there will be a significant number who opt out. For some this will be because they really cannot afford the 4% but for others it may be a choice not to sacrifice income and instead support their current lifestyle.
An excellent recent report from the Women’s Royal Voluntary Service demonstrates just how important retirees are to the UK in terms of the financial and non-financial contribution that they make.
It is therefore important that adequate retirement provision is encouraged to curtail the necessity to work longer and allow older generations to contribute.
One encouragement comes through making adequate retirement provision aspirational. Although the current tax treatment of pensions is one of tax deferral not tax relief, there has been continued criticism of the level of pension tax relief that is given to the affluent.
If the affluent are seen to champion provision, there is a chance that pensions could once again be something for all to which to aspire. Alas, two recent surveys indicate that this is less likely to happen.
Consultants LCP reports that executives are now ditching membership of a pension scheme in favour of cash supplements; actuarial investment advice firm Punter Southall reports 40% of firms surveyed believed that senior management would be less engaged in schemes over the longer term. Disengagement at senior levels will hardly engender a favourable attitude to workplace pensions.
But does this matter? Briefly, yes. As well as diminishing the number of potential pension champions, consider the impetus that the affluent sector provides to innovation. Drawing an analogy with the car market, electronic stability control will be standard on all new models from 2012 – a safety innovation derived from prestige car manufacturers that will now benefit all.
SIPPs, once seen as the preserve of the high net worth, but now applicable for middle income earners, pioneered the use of income drawdown and facilitated other innovations such as wraps and platforms.
SIPPs breed innovation and the affluent are able to diversify investments to explore new opportunities that may develop into wider market application.
There are calls for pensions to be made more relevant to today’s market. Taking a lead from car manufacturers, which are in a race to develop electric cars, would allowing SIPPs to invest in renewable energy – such as wind turbines and solar panels, boosted by feed-in tariffs – be a way forward? This could not only encourage pension saving but support green initiatives too.
Robert Graves is head of pensions technical services at Rowanmoor Pensions
