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Paying a high price for ageing

We’ve got a problem. A big problem. Successive governments have known about it for decades and over the past few years have shared their concerns with a general public that has yet to realise the enormity of the situation. That problem is how we are going to deal with – or pay for – our rapidly ageing population.

According to the Office for National Statistics (ONS), in 2010 there were more than 8.5 million pensioners. That means one in six of the population is over 65 years of age and in 40 years that will have risen to one in four.
ONS statistics show 42 per cent of pensioners’ average gross income is derived from benefits, including the state pension. No one would choose to live on the state pension, but failing to save for the future means that, in fact, many millions rely upon it.

Those who call for an end to means-tested benefits have floated the idea of a citizen’s pension of £140 or £150 a week that would raise the minimum pensioner income above the breadline. While this has merit, it doesn’t address the fact that most of us won’t have any means of supporting ourselves in old age. I’m not sure there is much difference between living in the poorhouse and sheltering in its porch.

In an attempt to address this shortfall, the government is introducing auto-enrolment later this year. This will force as many as nine or ten million people, who currently make no provision for their retirement, into their employer’s pension scheme. There’s no guarantee they will stay in as they have the right to opt out. However, inertia – that irresistible force that prevented many from taking advantage of their employer’s pensions in the past – may prevent people from leaving.

Quality is likely to improve as the schemes will have higher levels of governance

That seems like wishful thinking, as even the National Employment Savings Trust (NEST), the organisation created by the government to provide employer’s with a suitable pension plan if no existing pension is in place, anticipates opt-out rates of anything up to one third.

Even if auto-enrolment achieves its objective and enrols millions of workers into pensions, it is no panacea. Anyone saving in such a scheme should not expect to live the life of Riley in retirement. If they are lucky, their scheme will produce only a moderate income.

Ever since employers began to replace expensive final salary or defined benefit (DB) schemes, which promised a pension for life, with defined contribution (DC) ones that deliver an individual fund, the quality of pension provision has been eroded. This is not because there is anything inherently wrong with DC, but without contributions of 20 per cent or more, these schemes can never hope to approach the generosity of a DB scheme.

The National Association of Pension Funds is campaigning for higher quality DC schemes because, like it or not, DC is the model of choice for employers. Quality is likely to improve as the schemes run for the purposes of auto-enrolment will be managed by professionals and have higher levels of governance than the typical DC scheme. The Pensions Regulator has issued a set of principles that clearly indicates it is going to get tough on DC scheme provision.

This is certainly a new age of pension saving, but it is – necessarily – only the start. If people won’t save – which they probably won’t in sufficient numbers – the government may revisit compulsion with no chance of opting out. Once that arrives, contributions will be ratcheted up until the government feels equilibrium between private and state provision has been achieved.

Perhaps that’s not fair. Life isn’t fair. But life is now much longer and someone’s got to pay for the journey. Ultimately, that means all of us, but we’ll also have to shoulder a greater share of the responsibility too.

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