Yet again we are being bombarded with media articles on the pension crisis, triggered largely by the recent actions of defined-benefit schemes.
Is such a negative portrayal of the situation damaging or does it provide a glimmer of hope in the wider context of the pension savings gap?
The primary cause of the pension savings gap, it could be argued, is very simple – people are living longer and accordingly spending increased time in retirement. This needs to be paid for but by whom?
Traditionally, the promise of cradle-to-grave support from the state and paternalistic employers meant that the individual was absolved from responsibility to a large extent. Such views cannot be changed overnight and take time to work through the generations. Increasingly, I believe, younger clients are accepting that they must take responsibility for themselves but this is dependent on being able to afford this responsibility.
The world is changing and, unfortunately, this means that some of the things we have previously held dear must also change. I am amazed, therefore, at the way in which the closure of final-salary schemes has been greeted with such surprise. The foundation on which such schemes were built have gradually been eroded by social and political changes which, when taken in their entirety, can only serve to bring us to one conclusion.
It is said that the UK is a nation of shopkeepers and, indeed, the number of self-employed is forecast to increase. Long periods of employment with one employer are increasingly rare and leavers create costs.
Regulation has increased considerably for all those involved with final-salary schemes, whether advisers, trustees or employers. Increasing regulation and responsibility come at a cost – accounting standard FRS17 and changes to the minimum funding requirement are two such examples.
Equity returns over the past couple of years have been poor and the certainty of recovery which once greeted such falls is no longer so evident. The economy has changed and it is generally accepted that this will impact on equity returns for the foreseeable future.
The removal of the ability of pension schemes to reclaim advance corporation tax also impacts on returns. For money-purchase schemes this simply means that possible returns have had to be reviewed and downgraded but for defined-benefit schemes this has created funding shortfalls.
Finally, people are living longer and the proportion of those retired is increasing.
Such background information is interesting to ourselves and to some of our clients. However, for the great majority, this has little or no relevance to their financial planning. What is relevant is that individuals are motivated to take responsibility and the introduction of yet another product into an arena where there is already a multitude of products, all subject to different rules and legislation, does not provide such motivation.
That circumstances have altered to lessen the appeal of final-salary schemes is not in doubt and should not have been difficult to predict.
The savings gap has always existed and its growth would have continued regardless of whether schemes had remained open or closed. It is a concern that, by focusing on this one area, we lose sight of the bigger issue which is quite simple – more money is needed to close the gap.
Money-purchase arrangements are not “rubbish”, as one client suggested to me recently after reading the Sunday financial press, and it is a concern that this is the impression he has been given. However, I do not see it as my sole responsibility to convince him of the merits of such arrangements. It is my responsibility to convince him of the merits of making private retirement provision for himself in one form or another, rather than pin his hopes on the state or his employer.
However, I believe that any media coverage which triggers client interest in such topics must be seen as positive. It provides an opportunity for us to talk to clients about the very serious issues they face and which we can assist with. What is more, I will not be stuck for words the next time a client's opening words to me are: “I gather these money-purchase arrangements are rubbish.”
Tom Warwick is a consultant at Warwick Butchart Associates