How Britain’s Pensions Disintegrated

by Dr. Ros Altmann

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Sunday Telegraph 27 December 2009 ‘Comment Special’ Business page B8.

Ten years ago, the UK pension system was considered a model for others to follow. Our very low state pension was supplemented by good employer or personal pensions and the majority of workers seemed to be heading for a reasonable retirement. Equity markets were booming, interest and annuity rates were high and actuaries and investment advisers believed good pensions were easily affordable.

How things have changed! Over the past decade, our pension system has disintegrated. Workers’ retirement plans are not turning out as expected and many face the prospect of an impoverished old age if they do not keep working. Private sector employers are abandoning generous final salary schemes, switching employees into much less generous defined contribution plans, with uncertain investment returns, high charges and increasingly expensive annuities.

Confidence has been shattered. Even though the Government has introduced numerous measures to address the pensions crisis, it keeps getting worse. Several high profile pension scandals has severely undermined public trust and, unlike savers in failed banks – whose money has been 100% safeguarded – our regulatory system has not protected pensions in full. Indeed, until 2005, there was no proper protection for pensions at all.

Tens of thousands of workers put their life savings into their employer’s final salary scheme and, despite Government assurances that they were completely safe and protected by the law, they lost the lot. Instead of stepping in quickly to provide proper compensation, the Government refused to help. I spent years fighting for these pensions to be restored and watched people die in misery without their money. Naked protesters demonstrated year after year to highlight how they had been stripped of their pensions. The Telegraph offered marvellous support, but Ministers kept denying responsibility.

They even ignored the Parliamentary Ombudsman’s investigation, which concluded that the lost pensions should be replaced in full. We then had to take the Government to Court before it finally agreed to help. The whole sorry saga added to public mistrust of pensions. And, of course, the victims of another scandal – Equitable Life – are still waiting for compensation.

Thanks goodness we now have a Pension Protection Fund, which replaces 80-90% of final salary scheme benefits if the employer fails, but there is a cap on payments, so workers with pensions over about £30,000 could lose out more heavily.

The last decade has witnessed the disintegration of our once-thriving retirement savings culture. Although disappointing market returns, high costs and rising life expectancy have played a part, I believe much of the blame lies with politicians who failed to respond to the challenges of our ageing population as circumstances changed. Maybe having more than ten Ministers in charge of pensions since 2000 has something to do with the failure to get to grips with the situation.

People can no longer rely on their employer and are increasingly on their own, struggling with the costs and risks of providing themselves a decent pension. Unfortunately, continuous policy changes make this increasingly difficult.

Instead of ensuring that State pensions provide an adequate minimum level of security on which private pensions can be safely built, the National Insurance Pension has fallen way behind general living standards. Nearly half of pensioners now need means-tested Pension Credit – introduced in 2003 – to avoid penury. But the means-test often takes away their private pension, thus damaging saving incentives.

Having advised Government for several years from 2000, I have seen short-sighted, misguided policy thinking undermine our pension system. Did Gordon Brown ever truly want to encourage pension savings? Or did he just want people to keep spending and borrowing as much as possible, to maximize short-term growth? Perhaps that is why his new financial regulator (FSA) has operated asymmetrically, making it much too easy to borrow and much too difficult to save.

Despite all the initiatives, the pensions crisis keeps worsening. ‘Low cost’ stakeholder pensions were a failure,’ decision trees’ could not cope with the complexity of our system and ‘A’-day pension ‘simplification’ has been undone.

Even the Pension Commission’s recommendations were a political compromise just tinkering with the current system, rather than proper radical reform. Indeed, its proposed measures – due to start in the next couple of years – are already being changed before they begin.

Pensions are the ultimate long-term investment and trust is essential. Money is locked away for decades and cannot be taken out, even in an emergency, before your 50’s. Pensions policy, therefore, needs to operate over many decades, which clearly does not suit political time horizons.

We need a new approach? A permanent independent Commission to oversee pensions policy, like the Bank of England looks after monetary policy. It should address State and private pensions, as well as annuitisation and public sector schemes.

In reality, most politicians do not understand pensions. But then why should they? They will get great pensions, provided by taxpayers, without having to deal with the mind-numbingly complex and unreliable system they have designed for the rest of us. The sooner we take pensions away from politicians, and introduce proper, radical reform for the coming decade, the better.