Presentation on theme: "Is the UK Pension System fit for purpose? Roger Turner General Secretary National Federation of Occupational Pensioners The Future Outlook for UK Pensions:"— Presentation transcript:
Is the UK Pension System fit for purpose? Roger Turner General Secretary National Federation of Occupational Pensioners The Future Outlook for UK Pensions: Sustainable and Equitable Pensions for All
N.F.O.P is the oldest and largest occupational pensioners’ organisation in the UK, with over 85,000 members nationwide with members from Royal Mail, BT, British Steel and several other pension schemes. We campaign on behalf of our members and older people more generally, on issues such as improving pensions, health services and social exclusion. The Future Outlook for UK Pensions: Sustainable and Equitable Pensions for All
What are the aims of State pension provision? Does today’s State pension system meet these aims? What is the role of occupational pensions? Is the UK system too complex and what effect does it have on pension savings? Possible impact of the Government reform proposals Is the UK Pension System fit for purpose?
Is it for aversion of pensioner poverty? or Is it aimed at providing individuals with a “decent” replacement rate in retirement? or Is it both?
Old Age Pensions Act 1908 was the beginning of UK State pension provision, phased in from 1909. It was a non-contributory old age pension for those aged over 70 and was paid at a rate of 5s a week (7s 6d for married couples). The level of benefit was deliberately set low to encourage workers to also make their own provision for retirement. The pension was means-tested and to be eligible, a person had to be earning less than £21.10s per year, and had to pass a 'character test'; only those with a 'good character' could receive the pensions.
The plan takes account of two other facts about the British community, which should dominate planning for its future. The first is the age constitution of the population, making it certain that persons past the age that is now regarded as the end of working life will be a much larger proportion of the whole community than at any time in the past. This makes it necessary to seek ways of postponing the age of retirement from work rather than of hastening it. The second fact is the low reproduction rate of the British community today.
The provision to be made for old age represents the largest and most growing element in any social insurance scheme. Social security must be achieved by co-operation between the State and the individual. The State should offer security for service and contribution. The State in organising security should not stifle incentive, opportunity, responsibility ; in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family.
The Source of these statements? The Beveridge Report: Social Secutity and Allied Services 1942. Nothing is new. Yet the same issues are still being put forward as being serious problems which have to be dealt with today. Will we ever get it right?
The Beveridge proposal was to set up a system of Social Insurance. Contributions during a working life were proposed to fund a flat-rate non-means-tested income in old age. However, the system adopted was ‘pay-as-you-go’, based on National Insurance contributions sufficient to pay current pensions, because of the significant cost of pensions to those who had already retired but made no contributions. This funding dilemma was to be the common theme from then on: How to afford to pay for today’s and tomorrow’s pensions from current taxation (including NI)? An on-going battle between the Treasury and Secretaries of State for Social Security/Work and Pensions.
An original aim of the State pension was to slay one of Beveridges five Giant Evils, namely Want, by providing a state pension set at a level to avoid poverty in old age, funded from contributions made by workers and companies. But the Social Insurance model was too expensive and so the Pay- As-You-Go system was used. This led to a woefully small basic State pension. Poor pensioners had to rely on means-tested supplementary benefits subsequently called Minimum Income Guarantee (MIG) and now Pension Credit. In the 1960s and 70s the pressure was on to try to give a “decent” replacement rate via state provision.
This led to: Earnings related second tier State pensions: Graduated Retirement Benefit, 1961-1978 State Earnings Retirement Pension Scheme (SERPS) 1978-2002 State Second Pension (S2P) as we have today. SERPS was intended to provide a good, inflation proofed, earnings related additional pension. However, from the outset the future cost of provision was never properly assessed and successive Governments have watered down SERPS (and S2P) commitments. This is a common theme of Government pensions policy over the years.
The basic State pension on its own clearly does not meet the aim of either avoidance of poverty or a decent replacement rate. At £102 per week it is well below the estimated “poverty” level of £170. In “2008/09, an estimated 1.8 million pensioners in the UK were living in poverty” - National Statistics Office figures. Adding SERPS and S2P was getting there but they have been watered down and S2P will become flat rate thus removing any earnings link from State provision.
Final salary pensions are not new. The first known civil service pension was awarded in 1684 when a senior Port of London official became too ill to carry on, and his successor was appointed on a salary of £80pa on condition that £40pa of this was paid to his predecessor. And so began the first 50% pension, paid out of the salary of a younger employee.
From about the 1950s on, Companies developed good final salary or Defined Benefit (DB) schemes. Seen as necessary to attract the best employees. Provided good pensions for very many. Supplemented the meagre State provision. Then in the1990s Maxwell - everything changed.
1995 Pensions Act Well intentioned to protect DB members. Lots of regulation. But boom in stock markets hid real costs. Lots of companies took long contribution holidays. Late 20 th early 21 st Century stock market collapses led to serious funding issues. Surpluses turned into deficits. Then the actuaries woke up to the fact that we were all living longer adding much more woe.
Companies rushed to save money by closing their DB schemes. DB Scheme members declined from 8.1 million in 1967 to only 2.4 million today. Defined Contribution schemes now becoming dominant, even more so from 2012 with NEST, but all the risk is with the employee and not enough is being saved. There are still an estimated 50 % of workers in the private sector not contributing to a company pension scheme.
Occupational pensions have been a vital plank in UK pension provision. The Government must do all it can to ensure they remain so. Good DB provision has seen pensioner incomes increase faster than wages. But DB has peaked and will decline rapidly over the next 20 years. DC will not provide the same level of income unless much more is saved.
Someone retiring today could have: Basic State pension Graduated Retirement Benefit SERPS S2P Occupational pension (including a GMP from being contracted out of SERPS) Private pension All with different benefits, rules, accrual rates and different systems for annual indexation.
To Quote the IFS from The history of state pensions in the UK: 1948 to 2010: “The UK system of support for pensioners that exists today is a complicated one, with four main components – the basic state pension (BSP), earnings related benefits, flat-rate non-contributory benefits and means-tested benefits. Each of these has been tinkered with or reformed over time and, as new systems and rules have been introduced, entitlements under previous systems have sometimes been preserved.”
“This means that individuals retiring today can still be affected by pension systems and rules that existed over 40 years ago. The pension benefits available to a given individual depend not just on their National Insurance contributions history but also, crucially, on the dates they made these contributions and the date at which they reach state pension age (SPA), which itself depends on the individual’s date of birth.”
The effect of this complexity on pension savings is to deter people from making pension contributions because: They don’t understand pensions. They don’t know if it will be worth it. They are under financial stress in the early years of work – student loan debt, mortgage, children etc. They don’t trust the financial institutions with their money.
A single tier State pension will be easy to understand and much simpler to administer. It will allow people to make more sensible decisions about the need to save to achieve a reasonable retirement income. Whether or not it will, in and of itself, improve savings is, however, questionable. The level at which it is set will be key to its success. There will be winners and losers if year on year cost neutrality is adhered to. This will be seen as unfair.
NEST and automatic enrolment should lead to more people in work saving for their retirement. People need to feel safe in the knowledge that they will benefit from saving. So more and better communications are required to instil confidence in savings. First from better regulation to keep charges to the absolute minimum. Second a simpler State pension system so that means- testing is minimised. Third, protection of their savings from rogue dealings by investment managers – i.e. trust in leaving their hard earned money with financial institutions.
Currently we seem to work out State pension provision by: 1.How much have we got or can afford? 2.How do we distribute this? Future State provision should be based on: 1.Deciding what a civilised, rich society should provide. 2.Work out what it costs. 3.Then decide how to fund it. This will require some “courageous” political decisions, but without them we believe that pension reforms are doomed.