Letter commenting on pension burdens faced by UK employers

by Dr. Ros Altmann

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It was
interesting to read that the majority of employers know that the
pension contributions they are making for their employees will not
deliver generous pensions. The question we need to consider is why
this should be a surprise to anyone.

Pension expectations need to be adjusted. Pensions were originally
designed to last for 5 or 10 years, to reward long-serving employees
for loyal service and prevent them leaving work and living in
poverty for the last few years of their life. Nowadays, however, the
average job tenure is around 5 years, but we are trying to make
pensions last for 25, 30 or 40 years. Can employers really be
expected to shoulder this burden? The cost of providing what used to
be thought of as a ‘standard pension’ (around two-thirds of final
salary) has become so expensive that it is generally now
unaffordable for all but the highest earners. Over 20% of salary
would probably need to be put aside for 40 years, to provide a good
pension for 25 or 30 years of retirement. Employers contributing 5%
or even 10% of salary to a money purchase scheme are, therefore,
quite correct to believe that this is unlikely to provide a generous
pension.

Some serious re-thinking is required. Pensions policy is light years
behind the changes in working practices, demography and health
status and the sooner we revise social expectations of retirement
and pensions, the better. The Government and the individual will
need to shoulder more of the burden in future, since employers alone
cannot afford the current expectations of pensions.