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