Auto-enrolment must act as wake-up call on pensions torpor
Auto-enrolment might be the first step but we still have a long way to go before the majority start thinking about retirement seriously.
Pensions, bloody pensions. Who would bother with one in these terrible dark pension days scarred by mounting company pension fund deficits, plunging annuity rates, hidden fund charges, fallout from quantitative easing and volatile stock markets?
Well, if the latest research from investment house Baring Asset Management is to be believed (and who would doubt this august organisation post-Nick Leeson?) the answer is 15.7m of us.
According to this veritable City institution, 44 per cent of people aged over 18 who are not yet retired do not expect to use a pension to fund their retirement. Increasingly, says Barings, people are relying on property, cash (yes, moribund cash) and even the expectation of an inheritance to see them through the third age.
Amazingly, alarmingly and worryingly, 8.8m people have no idea whatsoever how they will fund their long retirement. It is enough to make a grown financial adviser, already shaking at the thought of a world post-retail distribution review, weep into his pile of under-utilised pension key features documents.
Should we be surprised by this rising antipathy towards pensions? Not at all. Ever since 1997, when chancellor Gordon Brown disastrously decided to impose a £5bn a year tax on company pension schemes, confidence in pensions has slowly been eroded.
Attractive final salary or defined benefit company pension schemes, once the pride of Great Britain’s occupational pensions system and the envy of the Western world, have been systematically undermined, leading to their widespread closure.
Some schemes have sunk without trace with members relying on the Pension Protection Fund to provide them with a reduced pension in retirement. Other company pension funds now teeter on the brink of meltdown, their future now imperilled by the Bank of England’s quantitative easing programme. As Ros Altmann, one of the country’s leading pension experts, recently said, defined benefit schemes (private sector, not those public sector schemes funded by the taxpayer) now face a “death spiral”.
She recently explained this death spiral in splendid terms. “The lower gilt yields fall, the worse pension deficits become,” she said. “The worse pension deficits become, the more trustees will feel they need to de-risk. This often means buying more gilts which itself means worse deficits because trustees are competing with the Bank of England which is also trying to buy gilts due to quantitative easing.
“Firms are left trying to find more money to plug pension deficits, causing funds to be diverted from creating jobs and expanding operations. Worryingly, too, companies trying to borrow money to expand, or to meet a pension recovery plan, are finding the banks increasingly unwilling to lend because of the pension deficit. This vicious circle must not be allowed to continue.” Too right.