Events | 2009.05.23
Britons who can't afford to become old
The UK population is getting older and faces deep financial, emotional and health issues. In the latest part of our series on the fallout from the nation\'s \'age quake\', we examine how a crisis will affect us all as company pension schemes collapse and stock market failures hit private policies. Ruth Sunderland reports on a generation who face working into their seventies - or living out their old age in penury
It\'s a balmy evening in May 2039. A gathering of smartly dressed, silver-haired people are raising their champagne glasses to toast the retirement of their company\'s longest-serving employee, who is leaving at the age of 83, after 60 years\' service. The youngsters, still in their 50s and 60s, know they have several decades ahead of them before they can afford to retire.
A dystopian fantasy? Not according to pensions experts, who warn that the UK faces a retirement crisis so huge it could make the credit crunch look like a blip. If we continue on our current course, Britain will simply not be able to afford to grow old: the only hope of averting wholesale misery in retirement, they say, is for us to accept we will have to work longer, consume less and save more.
The idea that the experience of a generation of better-off pensioners can be replicated in future, with people taking retirement in their 50s and living a prosperous, leisured lifestyle is just not possible, the specialists say. Working longer, for those lucky enough to be able to stay in jobs, could be the best-case scenario: the alternative is for the yuppies of yesterday to turn into tomorrow\'s "oddballs" - old, depressed, broke and living longer. Ros Altmann, a pensions expert and former economic adviser to 10 Downing Street, puts it succinctly: the pensions crunch will be worse than the credit crunch because it will affect more people, but both the public and politicians are intent on sweeping aside this unpleasant reality.
Altmann is not alone in issuing dire warnings about our collective failure to provide for the future: economists and actuaries are unanimous that the UK is no country for old men - and it is even worse for old women. The National Institute of Economic and Social Research found that levels of savings and wealth in Italy, France, Spain and Britain are too low to allow people to continue consuming at their current rate after retirement, and that the problem in the UK is "particularly acute". Separate research from the Pensions Policy Institute found a wide gap between what pensioners have put aside, and the amount they need to replicate the lifestyle they had while at work. Even relatively high earners are unable to match their pre-retirement spending without taking measures such as releasing capital from their home.
The figures are truly frightening: being old in the UK is for many people a hand-to-mouth existence. The National Pensioners Convention (NPC) reckons that the average private pension pot will give a single man of 65 an income of less than £2,000 a year; a pension pot of £100,000 will, at current annuity rates, yield an annual sum of just about £4,500.
Yet having a private pension at all puts you in the fortunate category: nine million people are relying on the state, which pays a full basic pension of £95.25 a week, or a £57.05 reduced rate for those - mainly women - who have not paid enough national insurance contributions to qualify for the full amount. Hardly surprising then, the NPC contends, that 822 old people fall into poverty every day in Britain - within Europe, only in Latvia, Spain and Cyprus are you more likely to end up old and poor.
More than 2.5 million old people are below the poverty line and, of those, two thirds are women, who fare even worse than men because they earn less and are more likely to have career breaks. High divorce rates mean they cannot rely on a husband\'s pension to bail them out.
Research two years ago by the Organisation for Economic Co-operation and Development found that the UK state pension system provides around 30% of average pre-retirement earnings, lower than in Greece, the Netherlands, Spain, Austria, Hungary and Denmark.
Clive Fortes, a partner at actuary Hymans Robertson, says: "You have people starting work later, because more go to university. They want to retire earlier and they are living longer. The maths does not add up."
The pensions crisis was gathering force even before the credit crunch, but the financial meltdown has exacerbated the situation for individuals, for the state and for companies. "It has damaged individual savings - whether that is a permanent hit or whether it can be recovered, I don\'t know," says Fortes. "People are having to replenish their own funds at a time of job insecurity and tight household budgets."
The crunch will also make it harder to fund the state pension. There is a mountain to climb because of the increased public borrowing needed to bail out the banks and prime the economy: state pensions, along with public sector pensions, require a continuation of economic growth and prosperity. As for company pensions, most are mired in deficit; for corporate Britain, that will be a huge drain for years to come, acting as a drag on the recovery and on share prices.
What can be done? "The only solution in my view is to work longer," says Fortes. "There is a general acceptance that a 65-year-old man isn\'t old, so he shouldn\'t be retiring yet. Raising the retirement age to 70 would have a huge impact - a five-year delay can boost your retirement income by 30%."
It wasn\'t always like this. The UK\'s company pensions, most of which were linked to an employee\'s salary on retirement, used to be the envy of the world. But a combination of longer life expectancies, poor stock market returns and a failure to build up funds during the good times has left companies in the FTSE 350 index nursing a combined pension fund deficit of £182bn, according to Fortes.
The National Association of Pension Funds reckons that 1,000 private-sector final-salary schemes will close to new members over the next five years, and a quarter will also take the more drastic step of closing to existing members.
The first big company to bar current pension fund members from accruing any more benefits could well be private-equity-owned pharmacy chain Alliance Boots, which has indicated it is considering shutting its scheme. That would be a bitter irony to John Ralfe, former head of corporate finance, who tried in 2001 to safeguard colleagues by moving the entire fund out of risky stock market investments and into bonds. He left a year later; soon after, the scheme went back into shares.
Ralfe is one of the few who can claim not to be merely wise after the event. He says: "There is no \'magic money tree\', which allows small savings today, invested in shares, to grow to a large amount tomorrow - that idea was always fool\'s gold. Companies and shareholders have always underestimated the real costs and risks of pension funds. The prime minister has been bewitched by the City and this applies to pensions - his ministers and confidants also believed in the magic money tree."
Traditional final salary schemes, the gold standard of retirement provision, were under assault before the credit crunch, but it could prove the last straw. Formerly paternalistic employers had been rushing to offload their schemes to pensions buyout merchants - private equity operators which have no relationship with the scheme members, and are in it solely to make a profit. This has happened at P&O, Rank, Emap, Lonmin and even Friends Provident, itself a provider of pensions. Hundreds of thousands of former employees have seen their entitlements bundled up and passed on to buyers in a multibillion pound game of pass the parcel - without being given a say in the transaction, let alone a vote.
The credit crunch has put an end to corporate pension sell-offs, for now, but there are other unappetising consequences. The downturn is leading to a big increase in corporate bankruptcies: accountant Punter Southall warns that £1.6bn of pensions are at risk from the latest wave of insolvencies, and there is already a queue of schemes waiting to be rescued by the Pension Protection Fund, set up as a lifeboat for workers whose companies go bust, taking their pension funds with them.
The policies being deployed to combat the crunch are also having a detrimental effect on pensions. Low interest rates are suppressing the returns on pension fund investments; and for complex technical reasons, the Bank of England\'s policy of quantitative easing - printing money - is wiping billions off funds, adding an estimated £12bn overnight to the red ink on the FTSE 350.
Down the line, funds are vulnerable if inflation takes off again as a result of printing money, because it increases their liabilities. "The policies being used to fight the credit crunch are damaging today\'s pensioners, tomorrow\'s pensioners and pension funds themselves," says Altmann. "If the government wants artificially to depress interest rates, which is what it is doing, it should look at providing special bonds for pensioners and pension funds to bypass that artificial reduction. But very little has been done to protect them."
Like Ralfe, Altmann questions the widespread view in the City that pension funds\' best strategy is to invest heavily in shares. "Our entire pension system is based on a giant bet on the stock market. The only reason we have been able to get away with paying such a low state pension here is because there was always the assumption that private pensions, invested in the stock market, would be generous enough to offset the state cuts. But look at Japan - in 20 years, the stock market is about a quarter of what it was. Look at the last 10 years in the UK, when the stock market has not performed."
The government, in the eyes of most pensions experts, has not only failed to tackle the problem - despite warm words about encouraging retirement saving, it has made it worse. There have been some achievements during Labour\'s 13 years, for instance, the introduction of the protection fund and a pensions regulator. There has also been a series of reviews by Lord Myners, Ron Sandler and Lord Turner among others; the Turner recommendations will lead in 2012 to new Personal Accounts, designed for people on modest earnings.
Critics point out, though, that one of Gordon Brown\'s first acts as chancellor was to abolish tax relief on dividends paid to pension funds, costing them around £5bn a year and making today\'s deficits markedly worse. Brown has also come under fire for his handling of the Equitable Life scandal, which damaged confidence in private pension savings and regulation, and changes he ushered in back in 2006 to simplify pensions and tax are widely viewed as having failed.
Measures in the most recent budget, to limit tax relief for higher earners, have attracted a huge amount of criticism. Some fear it will encourage the executives who make decisions about schemes to shut them down because they no longer stand to benefit personally. "It\'s just human nature," says Clive Fortes. "In some cases it has removed the last remaining incentive for managers to keep a scheme alive."
Trevor Matthews, chief executive of Friends Provident, adds: "The fact that the government is fiddling with pensions again is not good for us as an industry or as a country. Higher earners won\'t get much sympathy, but this is another nail in the coffin for pensions and saving. High earners will find another tax efficient way to save, but it will deter others lower down the scale and the overall image of pensions has taken another battering."
Deborah Cooper, of consultants Mercers, agrees: "They have made it so complex it is ludicrous - particularly in this budget. Something that should be a simple, good thing has been turned into a nightmare of complexity. On a psychological level, it seems to a lot of people that it is hardly worth saving because how can you get your head round it? And there is a lot of risk being put on to people\'s shoulders. Even the most financially literate make investment mistakes."
Not every investment guru is pessimistic. Lothar Mentel, of Octopus Investments, says: "Do I worry about my own pension at the age of 41? Not at all, it is great because I can get assets more cheaply at the moment. We are at the nadir of the credit crunch and from here it seems as if the long-term pension models don\'t function any more, but a year from now they might look as if they do work again." He advocates a radical solution to pension woes, arguing that young people should take out large loans and invest the money in the stock market to get the benefit of long-term investment returns. "We take out a big mortgage to buy a home, so why not to fund a pension? If we took out a massive loan at 25 and paid it back in monthly sums, we would have longer to build our retirement funds. There would have to be a state regulatory framework so you couldn\'t completely balls it up as a private individual, though."
It seems unlikely that credit-crunched Britons, struggling with credit card bills and negative equity, would embrace Mentel\'s solution. The first step towards averting the crisis, according to John Ralfe, is for individuals and politicians to face the facts. But, as he says, "there are not many votes in saying work longer and spend less".
Ros Altmann counsels a radical rethink of both work and retirement. She accepts that while many middle-class professionals may be keen on working beyond 60 or 65, manual labourers are less willing or able to do so. She insists, however, that we should still encourage older people to stay in the workplace, as the alternative would be grey armies of depressed and straitened over-50s, eking out a miserable existence.
"There is a new period of life - the bonus years - where you are still fit and well, you are gradually withdrawing from the workforce, but you are still economically active. I\'m talking about working flexibly, as mothers with young children do, but for old people. There should be no set age, like 65, when you are officially past it."
The single father: \'I suspect things will be even worse 40 years from now\'
Single father Adrian Horsley, who lives with his nine-year-old daughter Elizabeth in Cleckheaton, West Yorkshire, admits that he manages to save "next to nothing at all" for his retirement - and that worries him. How will he manage in 40 years\' time, he wonders.
But Adrian has little choice. For him, financially, life is a struggle. At 31, he works part-time as a campaign administrator for Yorkshire Building Society\'s charitable foundation, earning £8,500 a year. He receives around £400 a month in working and child tax credits from the government, but has no other income.
He pays 5% of his salary into his employer\'s pension scheme, a sum matched by the Yorkshire. "Things are very difficult," he says. "At the moment, I am breaking about even, with £1,000 coming in a month and the same going out. I have started selling things on eBay to try to make a bit more money."
He hopes to go back to full-time working once Elizabeth is old enough to get to school and back on her own, but even then his priority will be to put any extra money he has into savings for his daughter\'s future.
"It is worrying as my dad will soon be reliant on the state pension - and God knows how he\'ll manage on that," says Adrian. "I wonder what will be available when I retire? I suspect things will be even worse than now, but I don\'t have a choice about what to do."
Adrian has always been careful with his money. Having been a debt collector in a previous job, he has seen the trouble people can get themselves into. But his pension is not a priority when he has his daughter\'s future university fees and a deposit for her first home on his mind.
"I do read my pension statement every year, but retirement seems so far away," he says.
Lisa Bachelor
The struggling pensioner: \'We were told we would be cared for if we raised a family\'
Rita Young, 73, is forced to rely solely on the state for her retirement income as raising a family and a "meagre salary" made it impossible for her to save.
"Anyway, when I was younger we were told that we would be well cared for in later life if we took time off work to be a housewife and raise a family," she says. "So I never felt forced to make my own pension provision, and couldn\'t afford to anyway."
Rita, a retired market researcher, now has an income of £153 a week, made up of £134 in state pension and £18.70 in pension credit. "I get a bit of extra state pension from my late husband\'s contributions," she says. "But I opted for the reduced-rate \'married woman\'s stamp\' when I was raising my son, which we were told was a good thing - but it turned out that wasn\'t the truth."
Even when she was working, she says, her maximum salary was £3,500 a year in 1978. "I\'ve never had a good wage, or a particularly steady income," she says.
Her biggest outgoing is £79 a month on gas and electricity, and after that she is left with about £20 to spend a week on food. "All the other bills, including council tax, water and the percentage of rent I pay, at £6.50 a month, take a huge lump out of my money and leave me with just pennies," says Rita. "I know groups are campaigning to get the state pension raised, which is great, but I would also like not to have to be means-tested by this age - and for pensioners not to have to resort to budget food, which is full of sugar, salt and fat, just to survive."
She has no savings, and feels strongly that the recent budget has not addressed the needs of people in her position. "I want the state pension to rise to £165 a week, and even with the 2.5% rise the government has dished out in the budget this still keeps it below £100 a week for most people. Not enough is being done for pensioners on low incomes so that they can get out of the poverty trap."
She adds: "I put an extra jumper on to save money, but I can\'t understand why everything has to be so dear - the three main staples of life for me are gas, electricity and water and I struggle to afford them."
Turning to the future for the younger generation, Rita says: "Many of them are possibly going to be worse off than me, as now they can\'t even get work, and that gives them no chance of a retirement income. Who knows what\'s going to happen, but it doesn\'t look good."
Harriet Meyer
The divorcee: \'When it comes to retirement, I will just have to downsize\'
Fourteen years ago, Barbara Kydd\'s life changed when she divorced her husband and moved back to the UK after 20 years working in the far east.
"I was earning a decent salary and had a professional executive job," she says. "But coming back was a major struggle and I had to start all over again. It\'s taken me years to start earning enough to put money aside. Even so, it\'s not much."
Despite being with her current employer, a national travel company, for five years, Barbara has only just started contributing to its pension scheme.
"I wasn\'t earning enough to save money for the future before," she says. "I needed every penny. All the savings I\'d built up in Singapore went towards buying my house and putting my two children through university."
Since January, £79 of her monthly pay has been going straight into her pension.
"I have to work until I\'m 66, and in 10 years\' time my pension is going to be less than £8,000, but at least I can build something up. My children have left the nest and my mother is in a nursing home; because I\'ve been taking care of her, I\'ve not been able to really look after myself financially. When it comes to retirement, I\'ll have to downsize."
The 56-year old, who lives just outside Edinburgh, says she has no other savings. "It\'s extremely difficult to save, but I take each day as it comes. Everything costs more - travel is expensive, council tax is expensive, food is expensive. But I live according to my cloth and I\'m not extravagant; even though my pension won\'t be worth anything, I think I\'ll be OK."
Huma Qureshi
So how much should you be saving?
Tom McPhail, of financial adviser Hargreaves Lansdown, has provided a simple plan to help you get the most from your retirement, according to your age.
Age 20 to 40
As a rule, anyone under 50 should join a company scheme or open their own private pension - either a stakeholder or self-investment plan. If you intend to ignore your savings once made, opt for a middle-of-the-road scheme in terms of risk. For a bumpier ride with more potential growth, pile into the emerging markets. If you want a pension income of £10,000 a year at 65 and have no prior savings, you need to invest £200 a month. If you are 30, you need to invest £300.
Age 40 to 55
Despite a report by pensions guru Ros Altmann that bonds have outperformed equities over the past 10 years, McPhail believes people of this age should still predominantly invest in equities. "Bonds have only outperformed equities on four occasions in the past 100 years. On that basis I would still place more faith in the stock markets," he says. He recommends keeping about 70% to 80% in equities, with about half of that in the UK stock market. If you are 40, with no savings, you will need to invest £500 a month to achieve a £10,000 income at 65. If you are 50 you will have to invest £1,000 a month.
Age 55 plus
Normally McPhail recommends people start transferring a larger proportion of their savings from equities to bonds and cash at this stage, but given the stock market slump he suggests holding off for 12 months if you are five years or more from pension age. Although you can opt for automatic switches, which typically move 5% of your fund to safer investments each year, he thinks it is better to do it manually when the market looks good. Also, deferring the state pension for a year will boost its weekly income by 10.4%.
• Have you saved enough? Go to the Guardian Money Calculator
For more information, please visit
http://www.guardian.co.uk/uk/2009/may/24[...]itain-work-retirement-pensions
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