Pensions are again in the news. This time concerning the public sector. For a number of years now, private sector pension schemes have been closed or have changed from defined benefits into simple money purchase schemes. Why is this happening and what can we do?
In 1900, average life expectancy was just 50 years of age. Few people lived long enough to retire. By the 1950s, average life spans had reached 70. The state pension was introduced at age 65 giving 5 years of retirement after 50 years of work. Since then life expectancy has risen to 80, yet we still have an expectation that we will retire at 65 for the same pension contributions. Can we really retire for three times as long without paying more into our pension schemes?
The unwelcome answer is of course no. Many pension funds have a serious short fall in assets and it is uncertain whether they will be able to pay pensions in full over the coming decades without radical action. The situation is unsustainable. So what can be done?
There are a few possible remedies, none of them popular. We could triple pension contributions, though few would do that other than by force. We could cut pension benefits by two thirds. This is not a particularly workable plan as many pension schemes are not too generous to start with. We could maintain the ten years to one work to retirement ratio – work until age 73 and retire until 80. That wouldn’t popular either. Life expectancy is still getting longer so we’re left with a difficult choice. Accept some increase in contributions, working for a little longer and having receiving reduced benefits in retirement is perhaps the most workable solution. Or bury our heads in the sand and hope it all goes away.
Retirement is a modern phenomenon. For most of history people had to work all their lives to earn a living. The pension was devised so that we could live the last few years of our lives on the savings made from a lifetime’s work. However we now want to spend a greater proportion of our lives in retirement but don’t want to answer the question of how we fund it. With life expectancies rising year on year, it is a question from which we can no longer hide.
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16 Comments
I am amused – in a dark gallows kinda way – how the argument changes according to the target audience likely to bear the brunt of the cuts. In Colin Green’s piece there is not a mention of pension-related stringencies resulting from the Evil Deficit Monster. No, its just presented as a ‘gosh, wow, how did that happen’ naif surprise followed by resolute determination to grappel with unpalatable choices.
Well, we all know that the proposed pension ‘reforms’ are being used to inflict a bailout surcharge on retirees. Such a shame that we’re collaborating in this dirty business.
‘Can we really retire for three times as long without paying more into our pension schemes?’
It largely depends on whether or not you were on the good end of house price hyperinflation. I realise, of course that I am about to be told that £X00,000 of house price is not in fact an asset.
The truth is that a number of people will live high on the hog for decades and shove the bill onto future generations via the housing ‘market.’
@mike – Maybe I’ve missed it but the debate around the need to reform pensions has, as far as I can remember, always been about the long term unsustainability of the current system, not about the deficit.
The Hutton Report sets this out very well.
The debate started well before the crash backs this up. It is now nine years since the Pickering Report, for example.
How we got into this problem is not as important as how we get out of it. We have to acknowledge that pensions are not free and that we have to decide how to pay for them. The Lib Dems in coalition have removed the default retirement age which gives people an individual choice. For a given level of pension contributions, we can now choose to work longer and have a better pension or retire earlier on a lower pension. With rising life expectancies, the problem is only going to grow unless we do decide how to tackle it.
One curious fact I heard on the radio last week – of all the people under 50 in Britain today, one in six can expect to live to be 100.
Retiring at 60 and expecting to be paid for 40 years is simply not a realistic expectation.
David,
Life expectancy is growing by a couple of years per decade. The average life span is currently 80 but will be 90 by the middle of the century. But it’s not just old age that it increasing. We’re staying younger and healthier for longer. Middle age is being delayed and lengthened. Old age now starts much later and really, so should retirement.
One problem here is that the debate is dominated by people with comfy, sedentary lifestyles who could happily imagine continuing doing the same comfy, sedentary job until the age of 66 plus.
My late father did tough, manual work for 54 years (I have subtracted from this working span the five years he spent in the RAF during the second world war and the three years he spent enjoying compulsory accommodation courtesy of her Majesty the Queen).
I shouldn’t think there are many readers of this website (and I include myself) who know what it is to do manual work for 54 days let alone 54 years.
The tragedy in wait for aging populations is not the increased costs, of which there is clear political will on all sides to deal with, but that for most their last decade or so will be spent in a state of massive cognitive decline. 2 in 3 of us will develop dementia in our 70s, we will face a decline in memory, ability and ultimately an erosion of our self.
We can fix, or at lease patch up, most of the major organs that sustain us with the exception of the brain. It is doubtful we ever will. While we can regrow tissue, we cannot regrow the memories that were woven into now deceased brain cells. Dementia is irreversible.
We are facing a massive future crisis for the elderly if lifespans grow but dementia cannot be prevented. There are no easy answers to this, there is unlikely to be a miracle drug, fresh air, exercise and intellectual pursuits offer some protection against dementia, but are by no means wholly preventative.
I’m sure some of you work for councils and have seen projections of the long term costs of caring for the elderly. It is this, as much as pensions, that needs to be the subject of public debate.
“intellectual pursuits offer some protection against dementia”
It’s great to know that the time we spend reading LDV isn’t entirely wasted.
I have no problem with men,if they choose, being asked to work until age 70.But there is a non sequitar in the current leglislative proposal to reform pensions and that is namely it would mean up to 500,000 women in their 50`s being made,without choice, to work longer.
What has this legion of hard working women who mostly are also family makers and grandparents done to deserve this scant treatment and respect in the employment market? Ask them their opinion and most would prefer to keep their retirement flexible that allows them to retire at an earlier age. from age 60 years.
I think it is more `equal’ and `fair’ that women should be have a more flexible retirement plan on offer,then is seen to be the case at the moment and that our `Coalition Government’ must fully understand the multiple family role of women in drafting the changes in pension law.
These changes, whether or not they are eased a bit, are the more uncomfortable because governments and others who should have known better have been dodging them for decades. In the early 1990s, pension funds were thought to be too rich. Contribution rates for employers and employees were being reduced, and the funds were financing redundancies through early retirement. Meanwhile, some, but not all, public sector schemes had no backing funds at all, and were paid out of current income. This gave rise the gibe that the London Fire Brigade was primarily an organisation for paying pensions, rather than fighting fires.
So when, in the early 1990s, my employer reduced my department for the second time, I knew what I should do. I had a stressful job with, from time to time, very long hours indeed. I had seen several colleagues die at about the employer’s then pension age of 60. It was clear to me even then that increasing live expectancy would put all pensions under pressure. My personal and family interest was clear; it was time to take the money and leave. Just not going to work was worth there £3000 a year to me (commuting and clothing costs paid from taxed income). I could take less stressful jobs and have time for voluntary and community work.
I was very lucky, but my experience has several policy lessons, not, I think, yet fully learnt by the powers that be:
1) The assumed career pattern is for someone to progress upwards in pay and responsibilty throughout their working life, and then to stop work suddenly in their 60s. This often conflicts with failing health and increasing family responsibilities among the over 50s. So we need a cultural shift in how we use and regard people who work in the age-band 50-100.
2) We need to have more pensions backed by properly managed funds. This ensures that the ability to pay pensions continues without too much strain in bad economic times.
All governments from Mrs. Thatcher on at least, have taken their eye of the ball on pensions and working practices. Perhaps we are now starting to grasp the nettle.
Ian Sanderson,
“governments and others who should have known better have been dodging [these changes] for decades”
I agree whole heartedly. Sadly, retirement is not the only difficult issue to be dodged by successive governments.
“Perhaps we are now starting to grasp the nettle”
I hope so, but I fear raising the state pension age to 66 will not be enough to fix the problem.
“In 1900, average life expectancy was just 50 years of age. Few people lived long enough to retire. By the 1950s, average life spans had reached 70. The state pension was introduced at age 65 giving 5 years of retirement after 50 years of work.”
The state pension was introduced in 1911, by a Liberal government. They got the idea from 1880s Germany and Bismarck. As I understand it, employers didn’t like the inconvenience of workers dropping dead overnight (or at work), so got them to retire shortly before they were likely to die so that output wasn’t affected.
I assume that life expectancy *at birth* was 50 years. People who survived the troublesome years of early childhood/childbirth (for women)/military service (for men) would go on for longer.
national audit office says pensions are getting more affordable each year. if you make public sector pensions crap then people wont contribute to the schemes and the government will have to fork out more money to fill a black hole that doesnt currently exist
“Life expectancy is still getting longer”
This is a somewhat blase assumption. Will life expectancy continue to increase if people are ‘asked’ to work longer before they are able to retire?
In a final salary scheme, there is no linkage in the employee’s mind between the benefit (financial security for life) and its actual cost. As life expectancy increases, the cost goes up but the benefit is perceived to be fixed. It’s a tough sell to persuade employees to pay higher contributions or delay retirement in return for (apparently) the same or reduced benefits.
If final salary schemes are to survive in any form, some mechanism has to be introduced to change that perception. For instance, the pension might be fixed for the first 10 years, then variable depending on the
level of contributions during the years of employment. Or the level of pension might be linked in some way to a life expectancy index, re-calculated regularly along the lines of RPI/CPI. The aim would be to give employees a more tangible sense of the true value of their future benefits and thereby make them more willing to contribute at
realistic levels.
I’m not saying that any such option would be popular, but a more equitable sharing of risk between the pension provider and the recipient would at least make the system more sustainable. For the alternative, look at the private sector, where final salary schemes have all but disappeared, at least to new entrants.