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Pensions Market Assessment 2009
Key Note Publications Ltd, Aug 2009, Pages: 272
The 11.8 million UK residents over state pension age in 2009 are forecast to increase to 12.5 million in 2015 and 14.6 million in 2030. To generate the financial resources needed to support the country's pensioners, the Treasury is relying on UK gross domestic product (GDP) rising by nearly a quarter in real terms between 2006/2007 and 2015/2016, but the huge overhangs of national and personal debt and the constraints imposed by climate change and resource shortages make this forecast look over-optimistic.
The savings pattern in the UK, including the pattern of pension saving, is skewed by means testing. For many people, the future loss of means-tested welfare payments outweighs the possible benefits of saving. According to official statistics, almost one household in two had less than £1,500 in savings in 2007, and half of these households had no savings at all. However, the potential to save is limited. In 2007, the 60% of households with the lowest incomes were, on average, spending more than their income. Only the top 10% of households by income appeared, in 2007, to be saving adequately for the future.
Premium inflows for individual pensions reflect the fiscal benefits of pension saving for higher-rate taxpayers: a quarter of all tax relief on pension contributions goes to the top 1.5% of earners. The expected launch of Personal Accounts in 2012 is intended to revitalize mass-market pensions, but they are unlikely to make much difference to the volume of pension saving.
New consumer research shows that more than seven people in ten believe that pensions policy in the UK is in a mess. Five people in every six agree that a national debate is needed to decide how pensions will be paid for in the future. Almost seven people in ten say that pensions are currently too complex. Fewer than one person in four believes it is possible for workers on ordinary incomes to save enough for a comfortable retirement, and more than three in four women say they cannot afford to increase their savings.
Almost seven in ten individuals say that in the future more pensioners will access money through equity release. Nearly one person in two believes there is no point in making a big effort to buy a home if it then has to be sold to pay care-home fees. Nearly nine people in ten think there must be a national debate on organizing and funding the care of the frail elderly.
Individuals' pension worries are well founded. Overall, UK households, which put an average of just £20.20 a week into life insurance and pension contributions in 2007, are investing only around a fifth of the amount that would be needed, continuously over a working lifetime, to fund a simple but comfortable retirement. The few who are investing adequate sums are outnumbered by those who are not making any pension contributions at all.
Government predictions of future economic well-being appear too optimistic when the underlying constraints are examined. The basic rate of income tax will almost certainly have to be increased significantly. This could encourage pension saving if full basic-rate tax relief on contributions is continued, but individuals will have many other pressures on their incomes, including higher National Insurance contributions and higher fuel duties.
Pension funds face an era of low overall returns, owing to factors such as probable weak economic growth, higher costs for non-renewable resources and, particularly in the UK and the US, inflation resulting from the increases in the money supply. Many individuals have lost confidence in pension saving because of the ongoing abandonment of defined-benefit schemes, volatile fund values, and frequent government meddling with pension regulations. The planned Personal Accounts are unlikely to lead to a great advance in pension saving.
Property still offers advantages over conventional pensions. Property is tangible, it can be a source of income, and it can yield capital at a time of the owner's choosing. People on low to moderate incomes often cannot afford both to buy a home and to build up a pension fund, and in this case it is logical to opt for property and to use equity release for retirement income. Individual Savings Accounts (ISAs) also offer more flexibility than a conventional pension, although people who save in ISAs risk having to spend these savings if they need to apply for means-tested welfare benefits.
The objective for state and private pension income — to provide everyone with a comfortable standard of living — is unattainable. The future of retirement provision is likely to be a mixture of equity release, business ownership, part-time work, cash savings and investments (including ISAs), financial support within extended families, and conventional pensions.
The UK's housing shortage should protect the property market from a collapse. The prospects for small local businesses, which can generate retirement income for their owners, are improving because expensive fuel prompts shorter supply chains. On the other hand, personal and household debt and inevitably higher taxes will be a drag on new savings, and frequent changes in regulation damage the public's confidence in pensions.
The major role of insurance companies in pension provision in coming years is likely to be as managers of state and communal funds. Insurers also have an expanding role as providers of equity release to individual homeowners. Private pensions will probably become a niche product for individuals well within the top quintile of income distribution.
The world economy will have to come to terms with its own boundaries, including the scaling back of state and private pension expectations. Repercussions may include social disquiet, leading to authoritarianism in an effort to ensure that economic activity is not disrupted, or alternatively to a revival of community politics, which would foster local industries and encourage the retention of profits in local funds.
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