What is a pension? Up to the end of 2013, most of us would have defined it as a regular payment that is made to a retiree for the duration of his or her retirement. It’s worth remembering that because the latest pension reforms, introduced by the Chancellor, and apparently amended on a daily basis, are taking the whole idea of pensions in a completely different direction.
Far from being a regular payment that would provide an income in retirement, it is now possible to use your pension as a savings scheme, to dip in and out of as required once you’re over 55 or as an inheritance tax avoidance vehicle. This is a fundamental change in strategy that is completely at variance with the whole point of pension reform.
For clarity, we should go back to the turn of the century and the original reason why it was felt necessary to make dramatic changes to the pension system. Private sector defined benefit schemes were closing as companies realised that their balance sheets could not cope with the liabilities arising from open-ended commitments to these schemes that were rising rapidly due to increased longevity. Productivity increases were leading to situations where companies had far more retirees to pay than actual employees working. This was obviously unsustainable.
In parallel, most developed countries examined their state pension schemes and the majority found them wanting. It was clear that by the middle of this century, the majority of western governments would be in trouble trying to sustain a bloated retiree population on an ever-shrinking pool of workers, the UK among them. As a result the government made a number of key decisions. People had to save more for their retirement, so they would be nudged into pension saving via auto-enrolment. The amount of time spent in retirement had to be reduced, so the state pension age was raised. And they had to be encouraged to work as long as they were able, so phased retirement was introduced.
This was all going very well until early this year. Then it appears that the political expediency triumphed. Tactics for fighting next year’s general election trumped the strategy of long-term pension sustainability. Out of the blue, the mantra became that the pension companies were ripping off the customer and the customer should be allowed to get full access to their pension fund to do whatever they liked with. No longer would they be forced to use it to insure against longevity.
This was an extremely popular, essentially populist, move that effectively undermined the entire pension’s strategy being put in place across the first decade of this century. If too many people spend the pension money they are being forced to save, the government is back where they started, trying to support too many pensioners with too few workers.
Pensions are too long-term an issue that should never be used as a political tactic, as the consequences cannot be fully known for at least 10 years. Yet the government have persisted on this path in the name of ‘freedom’ and appear to have dropped the goal of making people take more responsibility for the provision of their own retirement income. The move has turned pension saving into saving for one’s own severance pay – a lump sum to soften the blow of stopping working but which has no relationship to how one is to support oneself for the remainder of one’s life. Maybe it’s time to stop and refocus on what this series of reforms were supposed to achieve.
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