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Tony Byrne: We need bold action to avert a pension crisis

What wake-up call does the Government need in order to do something about the looming pension crisis? 

The UK’s pension system is facing its biggest challenges yet, with successive governments doing very little – if anything – to make it fit for the twenty-first century.

With the state pension age rising, people are having later and later retirement dates imposed upon them, with the amount of pension eventually received very likely to fall.

What is more, because of its pay-as-you-go structure and a trend of increasing longevity, it seems inevitable that means testing will be introduced in the future.

Members of unfunded public sector pension schemes will face significant issues, such as increased contributions and reduced benefits. Both these schemes and state pensions are already bankrupt in their current form.

Indeed, with the dependency ratio forecast to change from three people working to every one person retired, to one person working to every one person retired by 2050, it is inconceivable that such unfunded pensions can survive in their current form.

Funded final salary pension schemes are already in their own crisis. Deficits are rising inexorably each year.

A third of such schemes have already been taken over by the Pension Protection Fund and I am sure many more are going to fail spectacularly in the near future, especially those whose sponsoring employers have old-fashioned business models that will get swept aside by new technology companies.

The problem is the PPF will increasingly become unable to bail them out while benefits continue to be reduced.

Money purchase pension schemes face troubling times too. Annuity rates are at near record low levels and, as long as interest rates, inflation and economic growth remain low as well, so too will investment returns.

This means many pensioners will end up depleting their income drawdown funds in full before they die.

So, all things considered, I think it is safe to say the entire UK pensions landscape is in a crisis. A crisis which is only likely to worsen unless and until the Government starts taking some bold measures to reform the system.

To give him his due, ex-Chancellor George Osborne did bring in some radical changes back in 2015 with the introduction of pension freedoms and Lifetime Isas. Sure, this was more to do with raising taxes for the Treasury than anything else but at least it was a step in the right direction towards reducing the burden on taxpayers, modernising pensions and making them fit for purpose.

Unfortunately, under current Prime Minister Theresa May’s Government, today’s Chancellor Philip Hammond is showing no such signs of radicalism. Even though that it is precisely what we need right now.

Until someone steps up who is bold enough to completely reform our pensions system, I am afraid things are going to get worse. A lot worse.

What wake-up call does the Government need in order to do something about it? Sadly, I cannot see anything happening until it is just too late.

Tony Byrne is managing director of Wealth And Tax Management

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Tony, what are your views on how these issues can be addressed? It’s all very well standing on the sidelines saying “It’s rubbish. Try again.” but that’s not news. Let’s instead get some views on how the issues can be addressed.

  2. We’re doomed! We’re doomed!
    I think not, Govt can afford to pay for anything it decides is a good idea politically.
    Why don’t they stop paying DB scheme pensions to their employees and convert them all to DC pensions. Oh, and try having an investment management team to invest the money instead of relying on a ‘Ponzi’ Scheme

  3. I agree with Johnny, it’s all very well saying there’s a disaster looming – I think we can all understand that, the question is, what can be done about it? Some ideas are needed.

    • I agree with you too Howard.
      Tony’s we’re all doomed isn’t very constructive. Yes there are thing wrong with everything, don’t bring us a problem (we already know about) bring us solutions.
      At least when I met with the FSA and latetrly the FCA to argue about the 15 year Lonsgtop issue, i went with potential solutions and compromises, what pisses me off is that they reected anything but the status quo, which THEY imposed in FSMA 2000, overiding common law.
      If the F-pack sort that out and actually compromise as some of us were willing to do on the Longstop (by clarifying it’s usage ratehr than removing it in common law as a defence or r-inserting it fully), then they might not get so much stick from those of us still here, but all the time they continue to play short term politicsover long term planning (when they are supposed to be independant of Govt), then they will continue to get as good as they try to give us.

  4. State pensions and DB schemes for starters are ponzi (pyramid)schemes reliant on people coming in from the bottom to feed the ones going out of the top !

    We all know there is no longevity in this methodology !

    The cure that Johnny and Howard are searching for is drastic (to put it mildly) but simplistic stop it dead in its tracks now… be honest and tell people why (as if they don’t know already)then you can work on a decision based on….. OK, every one who is in retirement now, no change, then stagger payments down by age group, IE those are age 60 will get 25% reduced pension and so on down to say 50 ? those after 50/45 well sorry, but you will have to look after yourself as there will be no pension !

    I don’t think AE is the answer ! people need proper pensions to fund retirement.

    Just in passing I was talking to some-one the other day (and not in a IFA capacity)

    He said, Quote; “I have a great company pension with Nest.. I am going to be alright in retirement” I replied, ” mind if I ask how much you put in”… its quite cheap, I only put about £35 quid in a month.

    My first though was, Oh dear poor deluded fool, then thought back to my first days (apprenticeship) as an adviser with a big company, crikey I thought, sales forces were far from ideal but at least this poor man got some kind of guidance, and yes, I do still have clients with pensions from those early days and all the hard work and top ups have worked well, they certainly don’t need to rely on state benefits !

  5. The issue is there is no easy solution to the problem (or it would already have been tried).

    Those already on the pension express (Government Workers, those with considerable DB and DC arrangements whether historic or current) have limited interest in changing the status quo particularly if it means less for them.

    Everyone who has retired parents looks at them and thinks “they aren’t doing so bad in retirement” forgetting that many are entitled to DB schemes which even at the lower end are unattainable to the vast majority today.

    The cake needs to be cut differently to increase the figure provided to those at the bottom and obviously in a world of government deficit the only place this can come from is those higher up the scale in one way or another. The Flat rate State Pension is a perfect example. It is meant to be cost neutral so higher earners will lose out on SERPs so lower earners will be brought up from a very low level. However the figure to be paid is nearer the lower end than the higher. Government should also stop looking at pensions as a “Cost” and therefore think constantly of grabbing some of the tax relief back for short term financial pot hole filling elsewhere in government expenditure. The pot should remain in retirement funding but it’s distribution be reappraised.

    Obviously the answer is to redistribute the current pension savings but without a race to the bottom. The debate is how and there are no “easy and good” choices. Perhaps some of the following might work.

    1. Provide the lowest earners with a very high level of tax relief to a certain contribution level (say matched tax relief at £1 for £1 to £2k or more).
    2. Restrict state related work pensions on a DB basis to a maximum of £35k pa regardless of occupation.
    3. Reduce the Annual Allowance to £30kpa and remove the Lifetime allowance limit which penalises early heavy savers and good performers.
    4. Put MPs on a DC pension linked to the UK economy so they can realise where everyone else is financially and meaning they care what effects their actions have.
    5. Provide heavy tax relief for employers that offer regular in house financial advice and education via an IFA. If you understand you are likely to be engaged.
    6. Stop kicking the pension ball around each year in line with a need to find money to bribe certain sections of the populace. Make it stable and predicable.
    7. Allow those who have made v. limited pension savings to have a higher annual limit in their last 10 years before retirement.

    It might not solve everything but it could be a start.

    • Some good ideas there, but I would adjust your point 1 for sure to something such as follows:

      1.) Everyone gets a really good rate of tax relief on the first “X” amount they save each month towards pensions. i.e don’t just limit it to low earners, then taper off the relief in stages and dependant on age.. ironically similar to the old pre A day system, as it allows catch up, if funds are available.

      2.) Scrap all public sector DB pensions from this day forward, preserved benefits for those with existing membership, but all schemes from day forwards should be money purchase. Nothing else is sustainable and it also means that the government cannot persist with “unfunded schemes”. If the public sector complain, then suggest to them they go find a different job in the private sector..i.e earn less, do more, get much worse pensions..

      3.) Ring fence part of everyone’s NI contributions to create a sovereign wealth fund that pays for everyone’s state pension, but in a “money purchase” format.

      4.) radically reform both the NHS and social security to make it so that it’s a balance of “rights” and responsibilities. I.e that you cannot chose to refuse to help yourself.

      Dramatically “relax” rules and regulation within the economy to provoke a major UK boom as we leave the EU.

      Do those things and most of the problems would be solved.

      The tinkering around the edges that they like to constantly do is never going to solve any significant part of the problem.

  6. Let’s take stock: the BSP has recently increased (relatively speaking) for those who aren’t ‘well paid’ to a typically £8k pa.

    £16k p/a where a couple.

    In addition, pretty much everyone is now funding a pension – albeit where on QE a small amount.

    Both of these will proportionately help the less ‘well off’ (as I suspect it would be those who ‘suffered’ under the old system).

    Some call it a race to the bottom – I see it as arguably some kind of equalisation – some DB are now ‘average salary’ – so probably a reduction but unlikely to be catastrophic. Some are also increasing contribution rates – an equalisation of ‘total remuneration’.

    Around all this is ‘pension freedoms’ – despite it’s name, the best reason for many to invest in a pension for many years (i.e. rather than take money out).

    All this is new and yet to be bedded in…. yes the ‘big picture’ suggests were doomed, the reality is those who ‘have’ perhaps in fact have a little less, those who ‘have not’ now have something.

    Whether it’ll be enough who knows but constant reinventing the wheel and tinkering around the edges doesn’t really help.

    The bottom line is, money is tight for many and culture takes many years to develop – I feel were heading (for those who need help) in the right direction.

    But where’s the headline in that?

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