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Funding the retirement boom

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The baby boomers are about to become retirement boomers. The people born in the few years just after the Second World War are now reaching their state retirement age. The baby boom was not just for a few years after the war either, it went on for well over a decade, so we are going to get plenty of new retirees hitting the country’s balance sheet for years yet.

Given what else has been going down on the national finances front lately, that is something that is probably not too helpful. The timing could not be worse. Right now, we have got about 12 million people over state pension age. By this time next year, we will have added almost another million to that number, an unprecedented leap and that is just the start.

Politicians are getting a bit worried by all this, so we can expect more changes on the pension front as we get deeper into the mire. But why are we so surprised that we now have so many 65-year-olds? That is not the problem. The problem is that 64 years ago we had too many one-year-olds. This is not something that has happened overnight. We have known how many 65-year-olds were going to be hitting retirement in 2011 for over six decades but have not done anything.

The boomers who are about to claim their state pensions have paid towards them through National Insurance for the last four decades or so.

All that money came in and went out. It should not surprise us that one day the millions who contribute every week and month towards NI would reach the point where they would start to claim their accrued entitlements.

The political response is likely to be a rise in the state retirement age. It has already gone up from 65 to 68 for some men and women and from 60 to 68 for many women. There is talk of a further rise to 70 or higher or bringing forward the increases that are already planned. Or maybe even both?

Can you imagine a company pension scheme being run on a similar basis? Fortunately, companies that promise their employees pension benefits are not allowed to put off paying for them for decades and decades. Company pension schemes have to be properly funded so employees can be sure the pension benefits they are anticipating will be there for them, whatever the company’s finances at the time they retire.

It is about time our state pension promises were properly funded too. One way of doing that would be to extend the principle of contracting out to include the basic state pension. Sadly, that is not what is happening these days. The opposite is happening as millions of people with defined-contribution schemes are losing the right to contract out of the state second pension. If ever we could do with a U-turn on pension policy…

Steve Bee is managing pensions partner at Paradigm Pensions

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Absolutely right ! The politicians and government gurus of all persuasions have, over a period of 40 years, buried their heads in the sand on this issue.

    You don’t need to be a statistician or even particularly bright to have realised that the State pension scheme should have been properly funded from the start, and that SERPS and all the other ‘crap’ was window dressing for a ‘blackhole’ that was increasing in size every year.

    Blame political short-termism and politicians who don’t need to worry about their living standards in retirement !

  2. Terry Mullender 8th October 2010 at 8:53 am

    As usual, Steve Bee is spot on.

    People in this country should have the right to opt out of the basic state pension.

    For far too long we have had to endure the gradual erosion of pension promises from the state whilst billions of taxpayers money has been wasted.

    Given a choice between a pot of money in my name or a government promise, I know what my vote would be for!

  3. Steve Bee probably knows more about pensions than many of us would even care to try to remember, though I have to say that I disagree with his suggestion that the facility to contract out should be extended the Basic State Pension. We will almost certainly never know ~ never be able to know ~ what proportion of people who were persuaded to contract out of the Earnings Related tier have ended up better off as a result, though my estimate would be that it’s precious few. The problem, of course, has been the relentless decline in annuity rates and the fact that nearly all comparisons appear to overlook the fact that State Pensions are (more or less) index-linked in payment. Whatever else the State provides, there needs to be a basic bedrock pension, the amount of which is entirely unaffected by investment performance, annuity rates, contract charges and, dare I say it, adviser costs.

    That aside, both the industry and indeed its regulator, in my view, should to be lobbying government to make retirement funding a simple and easy to sell proposition. At the moment, it’s complicated and increasingly difficult to sell. Stories of poor-performing pension plans which deliver disappointing levels of income at retirement are legion and the public are increasingly aware of these things.

    The government doesn’t help by constantly moving the goalposts and imposing endless complications. As a result, ordinary people have no confidence in pension plans and are therefore increasingly reluctant to embark on and, having done so, continue paying into a plan in which their money is effectively locked away. Is it worth it for tax relief at a much lower rate than used to be available in the past?

    IMHO, the best thing the government could do to revive interest in retirement funding is to introduce a Retirement ISA with no obligation at retirement to buy an annuity or any product under which the level of income available is governed by annuity rates (those cursed GAD Rates).

    Above all else, it would probably be a good idea to ensure that the name of any such product specifically excludes the word Pension, which has now gathered so many negative connotations in the public mind that it’s become an all but guaranteed turn-off. Surely, a Retirement ISA under which you’ll never have to buy a pension sounds a good deal more appealing than a pension plan?

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