Recent pensions debate has focused on the so-called triple lock, the guarantee that most state pensions will rise by at least 2.5 per cent a year, regardless of inflation.
Baroness (Ros) Altmann, the former pensions minister, has voiced concerns about the rising cost of this and its long-term viability. The Institute for Fiscal Studies has similar concerns about long-term affordability.
A debate on the commitment to the triple lock, much vaunted by former premier David Cameron and former chancellor George Osborne, is necessary to ensure we get value for money from pensions and fairness for all. But I think the debate goes much deeper into the whole purpose of pensions, and the question of how much pension is enough and who pays for it?
On a radio phone-in recently, I heard one caller suggest pensioners were now too well off at the expense of younger people. Other callers rang in to criticise him, but he had something of a point.
I am reminded of a conversation I had many years ago with the chief executive of a pensions company. To paraphrase his comments: “You shouldn’t expect a Rolls-Royce pension, if you’ve made Ford Fiesta payments.”
No one in their right mind expects the state pension of today and the future to be any more than enough to keep the wolf from the door. It is meagre at most, so increasing makes sense and the triple lock has improved the lives of many poorer pensioners.
The challenge, however, is how affordable this is long term. Should hard-pressed taxpayers seeing declining living standards pay more tax to subsidise pensioners, some of whom may already have their own generous private pensions?
No one in their right mind expects the state pension of today and the future to be any more than enough to keep the wolf from the doorWhen many segments of society, the so-called “squeezed middle” for example, are struggling to make ends meet, having endured many years of low or minimal salary increases, does it make long-term sense to ring-fence pensioners?
Many will say they are a special case, and I still cannot see the state pension being described as generous, but it is a topic that needs further investigation.
It is worth bearing in mind, here, that many pensioners are well-off because they have worked hard all of their lives and thoroughly deserve their pension, final salary, gold-plated or whatever you want to call it. Many were wisely nudged into occupational schemes at a young age.
I was chatting recently to a gentlemen who had just retired and was in his early 60s enjoying a decent company pension and a good standard of living. He told me he was apprenticed at 16 and worked all his life for the same employer, a working life of nearly 45 years. That means 45 years of contributions and 45 years of well-managed occupational pension.
How could anyone describe him as not being fully entitled to a decent pension for the rest of his life?
Contrast that with a student who exits university with huge debt at 21 or 22 and may only have held down part-time jobs.
They struggle to find a well-paid job and end up in and out of low-paid and zero hours work, along with a couple of back-packing trips overseas, before finally settling down in their late 20s when they find a reasonable job which, unfortunately, offers nothing like the security of previous generations of jobs.
I am not trying to divide generations here, but graduates have to accept that the price for attending university may well be a poorer pension in later life, unless they do something to make up the missing years.
So, in a sense, pensions are something of a lifestyle choice. Previous generations accepted that a lifetime of employment with one firm with a decent pension was worth the sacrifice to enjoy a better retirement. Current generations may not accept that sacrifice.
Whether the triple lock stays or goes will make very little difference to this equation, but people will need to accept the lifestyle choices they make now will be with them forever.
Auto-enrolment has certainly helped, and we are well on the way to ensuring that millions more will be making contributions to their pension. Opt-out rates are relatively low, which is encouraging, but the contributions are far from realistic.
It is wrong to expect a 26-year-old paying in a couple of per cent of salary a year to their auto-enrolment scheme to make up the same level of contributions as someone who has been an apprentice since the age of 16 and has been paying in 10 per cent or more of their salary.
It is probably time to level with people in a far clearer way, via the Pensions Dashboard or whatever, that unless they pay in a significant chunk of their salary they are not likely to enjoy a decent retirement and the triple lock will ultimately make very little difference to that equation.
UK contributions are simply too low on average to provide people with the retirement they dream of, and that means the government must be more honest about the solutions and the cost.
Kevin O’Donnell is a financial writer and journalist
