Funding the future

It is often talked about as a ticking time bomb: too few workers saving too little for their retirement. And we are all supposed to be living longer than ever before – so who is going to pay for our later lives?

The government has already warned me, in the starkest possible terms, that I cannot necessarily rely on the state for help. A few years ago, I received a letter from the department of work and pensions, telling me I will only have about £100 a week to play with when I hit retirement, unless I start making my own provisions now.

Bear in mind that I got this letter just after celebrating my 21st birthday. I did not have a job at that point. I would only hit my stride and find my first full-time role a few years later, having been forced to change career tack and move cities.

I also got this missive at a time when student debt loomed large in my mind. I was all too aware that, if I were to get a full-time job, the student loan company would be a constant companion throughout my twenties. And I consider myself one of the lucky ones. I saved more than most on housing costs by moving back home before using family funds to help buy a place with my brother. Many of my working friends might as well get their employers to set up a direct debit for their landlords and redirect their salary to them. Most of them can barely find any leftover money for the things they want in life.

With all that comes a degree of financial instability that leaves little room for long-term financial thinking. That is a cold hard fact that cannot be ignored.

Yet the government is making us all sign up automatically to a pension whenever we enter a full-time company role, and we must then choose to opt out if we begrudge the monthly contributions. The architects of auto-enrolment argue that this will harness the financial apathy of young people, encouraging them to save today in order to fund tomorrow. They cite the relatively low opt-out rates seen so far as evidence that this policy is working. But my friends are suspicious of our workplace pensions system – and rightly so. For starters, many are astonished at the huge difference between their grandparents’ pension arrangements and what is on the table today. My granddad worked for GEC for 50 years and retired at 65 on a pension amounting to two-thirds of his final salary and an index-linked widow’s pension. Now most of those final salary schemes have become sepia-toned relics, fading from corporate life week by week.

Our DC pensions from different companies can, in theory, get thrown into one pot, and if Steve Webb has his way, pot will automatically follow member. But my peers ask me troubling questions about the system. What kind of annual income will we get from that pension pot? How much will annual management charges for pension schemes eat into our capital, particularly for schemes in companies we may have left a long time ago?