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Saving pensions

Our private pension industry has been a cornerstone of our economy for decades and the pension industry has generated billions for investment in UK and world stockmarkets.

Our private pension system has been the envy of our EU partners but there are cracks appearing and private pensions are under pressure, in serious danger of being undermined unless the Government makes the right moves and quickly.

Leading product providers have reported heavy falls in sales of individual pensions for 2003, ranging from 10 to 30 per cent. These gloomy numbers follow a 7 per cent decline in individual pension regular contribution in 2002. The continuing downward trend is of concern to the industry and should worry the Government.

It is vital to ease the pressure on the state pension budget that is set to spiral out of control in the years ahead. The cost of state retirement pensions has soared from £22.8bn in 1991 to £43.2bn in 2001.

Several challenges confront the UK in funding retirement incomes for future generations of pensioners and the key influences are considered below.

The conclusions of the latest population study in the UK are stark. People are living longer and the working population is shrinking, in common with other highly developed countries. The prospects of longevity are good. Better diet, advances in medical science and safer working environments all contribute to a longer life expectancy. In 1900, the average life expectancy at birth for men was 50. In 2002, it increased by a staggering 26 years to an average of 76.

The 2002 census indicated that 10.8 million people are over state pension age, about 18 per cent of the population. The population of the UK increased from 1992 to 2002 by 2.7 million to 59.2 million. The cause was primarily improved longevity as birth rates fell from an average of 2.4 children per family in the 1970s to 1.6 in 2000.

By 2020, the pensioner population is expected to increase to 12 million (an estimated 19 per cent of the population) and by 2041, the forecast is 15.3 million pensioners, which means that one in four people will be pensioners. Within the 2041 forecast the number of people aged 80 and over is estimated at 4.9 million – more than double the current number.

Based on these forecasts, is it realistic to provide state pensions for all? When the Atlee Labour Government introduced the old age pension in 1945, state pensions were paid on average for two years until death, the average payout period in 2002 was about 11 years for men and about 19 years for women and the scheme has now matured with millions of pensioners getting benefits.

The basic state pension has always been met from current tax revenue. To continue this will place a massive financial burden on the future generations of workers.

The ratio of workers to pensioners, known as the dependency ratio, is a critical indicator for governments. The current 3.3 workers to pensioner ratio is estimated to fall to 2.4 by 2060.

The demographic issues will have longer-term consequences which demand urgent Government action because building private funds for decent levels of retirement income takes decades of savings.

A successful national pension strategy must have all-party political support. Social security receipts for 2003/04 are projected to be £74.5bn, approaching 20 per cent of the Government&#39s total taxation revenue for the period.

If we accept the demographic trends, the Exchequer faces huge increases in budget demands to support pensions and healthcare services for millions of elderly people.

Another indicator confirming rising pension costs comes from the Department for Work and Pension. According to statistics published in January 2004, 2.6 million of the country&#39s poorest pensioners are now receiving the new pension credit (on average £45.30 a week) to bolster low incomes. However, the Government estimates that around 4.9 million pensioners are eligible to claim pension credit.

Politicians face difficult choices in tackling the long-term funding of state pensions, such as further increases in general taxation, possibly raising the state pension age beyond 65 for men and women, and rationing payouts by means-testing based on private income/assets. All or a mix of these options will be necessary unless private pension ownership grows rapidly.

But none of the options to meet forecasted state benefit payouts will be welcomed by voters, particularly pensioners, many of whom believe their pensions should be significantly increased because they deserve to share in the nation&#39s growing prosperity.

Pension issues are part of a wider malaise in the decline of long-term savings in the UK. The December 2002 DWP report suggested that as many as 13 million people are saving too little for retirement, with an annual savings gap of £27bn and growing.

Equity market falls in recent years have clearly not helped win over savers. Unit-linked funds have performed badly and millions of endowment policyholders face lower payouts as bonus levels reflect periods of negative investment returns.

However, equity investments are long-term savings and in 2003, fund managers averaged over 18 per cent growth to help recover some of the previous losses. During the equity market slump, the property market boomed on the back of historically low interest rates and the loss of confidence in equities.

Mortgage lending and other loans set new records month on month. Many savers regard investment in property as the best route to accumulate capital for retirement.

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