We All Need Pensions

The report We all need pensions - the prospects for pension provision was published* by the Pension Provision Group during the summer of 1998. The Pensions Provision Group (PPG) had been set up by the Government during the summer of 1997 as an independent group with the specific terms of reference "to determine the current levels of pension provision in the UK, and likely future trends". The PPG was chaired by Tom Ross, former Chairman of the National Association of Pension Funds.

Essentially, the role of the PPG had been diagnostic rather than to formulate policy. However, at the time the PPG's report was published the then Secretary of State, Harriet Harman, described the report as 'authoritative' and she confirmed that it would play a crucial role in informing the DSS ministerial team in preparing the Green Paper on Pensions.

The PPG arrived at 15 main conclusions.

The state's role is necessary and affordable

Because state pensions are increased in line with prices, they will be a falling proportion of average earnings. National insurance contributions are calculated as a percentage of earnings so the required contributions necessary to fund state pensions will actually not need to increase, despite the increasing number of pensioners. The PPG recognised that only the State could effect a redistribution of income to those pensioners who had received low lifetime earnings.

Occupational schemes have boosted some pensioner incomes

Past growth in the coverage of occupational schemes and improvements in benefits as a result of higher earnings and legislation will continue to raise incomes for many new pensioners who have better provision than their predecessors.

The State Earnings Related Pension Scheme (SERPS) is currently better than many people think, but it will decline.

SERPS provides a pension currently worth 21% and 18% respectively of full full-time average earnings in the cases of a man and woman, not contracted out, who have a history of earnings at the level of their sex-specific national average earnings. Yet this current level has peaked and will fall to a projected 13% and 16% respectively in 2050. Moreover SERPS does not cover the self-employed.

A further rise in pensioner inequality seems very likely

The rise in pensioner income inequality will result from the move to greater reliance on earnings-related forms of pension provision and the continuing erosion of the value of state pensions relative to earnings.

Means-tested benefit levels will inevitably continue to rise

If the income support floor is linked to prices, the rate of benefit for a single pensioner over the age of 80 will fall from about 19% of average earnings to about 8% by 2050. In practice the PPG thinks that no government would find this acceptable. To avoid this outcome, means-tested benefits would have to rise faster than inflation.

Personal pensions provide some opportunities

Although personal pensions have resulted in some people saving more, they are not suitable for those on low pay because of their high charges. They suffer from a bad reputation because of the mis-selling scandal.

Compulsory provision is not new

SERPS, and its contracted-out replacements, represent a compulsory second-tier form of provision for employees although not the self-employed. Any extension of compulsion would have to strike a balance between the long-term benefits to individuals - in the form of higher retirement incomes and to future taxpayers in the form of lower expenditure on means-tested help - and the right of individuals to have freedom of choice in how they use their money.

Those who can save more should be encouraged to do so

However, there are three problems in extending non-state pension provision to low earners: they cannot afford to pay the necessary contributions, the contributions give rise to low amounts of pensions and the proportional cost of administering these small amounts of pension rights is high. There would be little financial incentive to save for retirement if the only effect is to reduce entitlement to means-tested benefits that would otherwise be paid.

Pensioners do not share in economic growth

Standards of living for pensioners with price indexed pensions will fall relative to the rest of the population although this only becomes an issue as people live longer and so spend more of their lives in retirement.

The position of women is changing

The PPG believes that future prospects for women are better than in the past but further improvement depends on employment law, child care policies and equalising levels of earnings between men and women.

Self-employment can increase people's risk of being poor in old age

The rapid expansion of the numbers of the low paid self-employed will cause problems as they will have to rely exclusively on the basic Sate pension and means-tested benefits.

Everyone must be able to plan with confidence for retirement

Improved public awareness of pensions is hampered by the current complexity of provision and its regulation. The Government must explain unambiguously the likely future value of state pensions and maintain a stable tax regime for non-state pension provision.

Pensions have had, and always will have, an element of risk for the individual

Risk includes legislative changes (such as the loss of tax credits on UK dividends), poor investment performance, high charges and high inflation. The low paid are the least able to cope with adverse effects of risk. There is also risk in relying on state provision as the changes to SERPS have shown.


More pre-funding is not a panacea

All pensions are a charge on the economy at the time they are paid and there is no overriding economic reason to change policy to alter the balance between pre-funding and pay-as-you-go systems. Indeed the PPG concludes that it is best not to rely on either system entirely.

Better informed and co-ordinated policy making is needed

A consistent approach to policy making is needed. There should be an independent organisation to have lead responsibility for accumulating, analysing and publishing information about current and future pension provision and its implications.

* The full report, ISBN 0-11-762607-4, priced £25, is obtainable from the Stationery Office.

For further information please contact Jane Marshall, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000

This article was first published in the Winter 98/99 Hammond Suddards Pensions Newsletter

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.