How many reports does it take to get the message across that the UK private pension system is “not fit for purpose”? Those of us nearing retirement age have started looking at how much we will have to live on and realising that it’s less than we had hoped for – much less. This means continuing to work into our 70s just to live, much less enjoy the never-ending holiday promised by the brochures.
It started at the end of last year with a report from the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA). The report’s author was David Pitt-Watson, chairman of Hermes Focus Asset Management, and he didn’t mince his words. He was the first to state that the sector was “not fit for purpose”, but also “hugely inefficient”, with up to 40 per cent of the money we pay into funds being swallowed by charges.
His report, Building the consensus for a People’s Pension in Britain, drew comparisons between people in the UK and other countries in Europe. It says that if someone from the UK and someone in a similar position in the Netherlands saved the same amount for their pension, the Dutch person would receive 50 per cent more income on retirement.
Pitt-Watson wants to see the whole system reformed, and he proposed a “best practice” low-cost system in which there was a limited number of large suppliers. Savers would put their money into collective schemes, cutting out the need to administer and report individual performance – something that causes your money to earn much less than you expect.
The report suggests the Pension Schemes Act 1993 should be clarified. The law should allow what are known as “collective defined contribution pensions”, similar to those in the Netherlands and Denmark which have the lowest levels of pensioner poverty in Europe. It says that political parties, employers, unions and pension funds should agree to implement a “pensions architecture” that brings the UK in line with those countries.
But Pitt-Watson is not alone. Enter Jason Riddle, co-founder of Save Our Savers. He too believes that the current system is “not fit for purpose”. But he also argues people heading for retirement are “facing a bleak future” and have every right to feel “double crossed”. The stock market crash, low interest rates and rising inflation have had a drastic impact on people’s future income.
Riddle believes that the private sector “should be stronger in voicing opinions on pensions and savings. It is being given a hard time, yet it is essential to a robust economy. Annuity rates have fallen by 45 per cent over the past 16 years, so all a typical pensioner can afford is a fixed income, guaranteeing that living standards will fall. Workers in the private sector feel so helpless.”
Riddle says that this is just one idea intended to spark a wider debate about how to improve the country’s savings rate. He plans to take his case to the Bank of England when the Monetary Policy Committee meets this Thursday, and he has invited anyone who feels aggrieved to join a protest in Threadneedle Street.
“It is now time for action,” Riddle says, “and getting politicians and the finance industry on board and to mobilise savers to protest against not being treated fairly. The private saver may not have the fearful bite of the public sector unions but the consequences of disregarding their needs will have a far more lasting and damaging effect on the economy.”
Last month, a survey from AXA – its Big Money Index” – showed that, for those nearing retirement, confidence in their financial future was low, with 35 per cent saying they don’t have enough money to retire on. To make matters worse, people under the age of 50 are cutting back on savings and borrowing more to fund their lifestyle.
But another survey from Baring Asset Management shows that 39 per cent of British adults have never made a change to the risk profile of their pension plan. The research also revealed that 17 per cent of people are unaware of the level of risk involved with investments. It agreed that more than a third of the population said they didn’t have enough money to save for retirement.
Little in the Pensions Reform Bill currently going through parliament will make any difference, since it focuses on the state system. However, it will at least this easier to understand. As Iain Duncan Smith, the secretary of state for work and pensions, said earlier this year: “We have to fundamentally simplify the system. And we have to make it crystal clear to young savers that it pays to save.”