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Crisis points

Scottish Life group head of communications Alasdair Buchanan says snapshot surveys of the pension crisis may give a widely varying picture but short-term solutions such as selling the family silver must not obscure the fact that fundamental changes are needed

You could be forgiven for feeling more than a little confused. Received wisdom for several years has been that we have some form of “crisis” with pension provision.

Defining the crisis may be a matter of judgement. Perhaps it is a crisis of distribution, with advisers having a near impossible task in taking account of the increasingly significant impact of means-tested benefits on the advisability of pension savings.

Or perhaps it is a crisis of confidence, brought about by the publicity from the Maxwell scandal and pension misselling, by the stockmarket slump from 2000 to 2003, or by the rising cost of annuity purchase, as low inflation and increased longevity make their impact on annuity rates.

In any case, it is clear that whatever the crisis, it does not affect everyone, by any stretch of the imagination. Many people will be perfectly comfortable in retirement but many more will not be, according to industry experts and independent analysis. Or so we thought.

In the past few weeks, two reports have cast some doubt on the scale of the pension “crisis”.

First, the respected think tank, the Institute of Fiscal Studies, published a report entitled, Prepared for Retirement? The Adequacy and Distribution of Retirement Resources in England.”

This report concluded that the risk of pensioner poverty was not as high as others – notably the Pensions Commission – have suggested.

The commission, in its interim report just over a year ago, indicated that around 40 per cent of individuals between age 46 and the state pension age would have inadequate incomes in retirement.

But the IFS study puts the figure at just over 11 per cent. It based this on individuals between 50 and SPA but that small difference in age groups certainly does not account for the huge difference in the numbers of those affected.

What are the reasons for these very different views?

There are two obvious factors which help explain the discrepancy, although they also raise several more questions about the scale of inadequate pension saving.

The first factor is that the IFS based its study on households whereas the Pensions Commission considered individuals. But it is far from clear which of these makes more sense. If a household continues to operate as such, then there is a reasonable case for using the household income. But if it does not (and the high level of divorce rates clearly cannot be ignored), then individual income must be the measure used.

The recently published DWP report on Women and Pensions graphically illustrates the problems that many women face as a result of the unfairness of the current pension system.

In part, this is caused by women relying on the “household” approach and the reality is that all too often it just does not work.

The second factor which causes the difference between the IFS and the Pensions Commission is the effect of other “wealth”, notably the value of property, and the potential for future inheritance.

These are not new arguments. The phenomenal growth of residential property values over the past generation has had a major effect on the UK economy generally. The IFS results are predicated on the double benefit of people crystal-lising at least some of the value of their own property to support retirement income and of them inheriting property from parents or other relations.

A number of issues arise from this scenario.

How realistic is it to turn the family home into an income stream? Equity drawdown may have a role to play in this but it also has well publicised concerns. Downsizing to release capital may be a reasonable option but relies on a sound and stable market. If 30 per cent of pensioners – the difference between the IFS and Pensions Commission figures – are going down this route, what impact will that have on the residential housing market?

In addition, what effect might behavioural change have? With people living longer and healthier lives, this is strong evidence of a change in behaviour by the baby-boomers, compared with previous generations. There are more foreign holidays and continuation of a good lifestyle well beyond retirement age.

There has even been an acronym invented to describe this: SKI-ing – Spending the Kids’ Inheritance.

More practically, the “inheritance” may have to be used to pay for long-term care, as increasingly the costs for this are moved from the state or local authority on to the individual and their family.

Finally, and not to put too fine a point on it, the IFS approach is effectively selling the family silver. It may work once but once it is been done you cannot repeat the exercise.

It may offer a get out of jail card for some people but it does not provide a solution for the following generations. They will be faced with the Pensions Commission mantra of “work longer, save more, pay more tax” – or some combination of these.

It would be doing a great injustice to the Pensions Commission to imply that it had somehow overlooked the contribution that housing and other wealth and savings might make to retirement. Indeed, its interim report devoted an entire chapter to the issue.

Its conclusion was that housing equity cannot be a sufficient or universal solution to funding retirement.

Not least of the reasons for this conclusion is that housing wealth (and inheritance) is distributed unevenly. Put simply, the law of averages does not work. Those without significant pension savings are also much less likely to have significant housing wealth or significant potential inheritance.

It rather looks as if anyone who pins their hopes on the IFS report and expects an easier solution to the challenge of future retirement planning, will be sadly disappointed.

But no sooner had we got over the shock of IFS suggesting there might not be a pension crisis after all, than another thinktank comes along with a similar conclusion.

Tomorrow’s Company is less well known than the Institute for Fiscal Studies, but its report at the end of last month had a similar theme. It concluded that “as a society, we can afford to grow old”.

In fact, there is some truth in this, although, as often happens, it is far from being as simple as these words seem to suggest.

Its “silver bullet” to the pension crisis is simple – increased productivity. If we all work harder, more wealth will be generated so we can all save more in our pension plans as well as paying more in taxes to support a better, and fairer, state pension system.

In fact, this has considerable similarities with the Pensions Commission’s “work longer; save more, pay more tax” solution. Perhaps it should be “work harder (and so be able to) save more and pay more tax”.

Tomorrow’s Company also makes the point – as at least one pension guru has previously done – that if everyone was to save more (either voluntarily or because the Government had increased the amount of compulsory saving) it could have some rather nasty consequences for the UK economy. We have already seen how a downturn in consumer spending can have a major impact on the health of UK plc.

Where does this leave us? Well, possibly arguing over the semantics of just what is a “crisis”.

But the conclusion seems inescapable. We do need to have some fundamental changes – certainly to provide a much simpler and fairer state pension system.

Overall, we must have some combination of working longer, saving more and contributing more for better state pensions.


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