Pensions must be more user-friendly to restore trust

6 November 2012

The Bank of England's policy of quantitative easing (QE) has so far bought £375 billion of gilts, which underpin all UK pensions. This has added to the problems already building from previous years.

The latest official statistics reveal the number of people in the private sector with an employer pension is at a record low, as confidence and trust in pensions have collapsed. Only a few years ago, our pension system was the envy of other countries; now it is in crisis.

Many workers reaching retirement are finding their private pensions have not delivered the pension income they expected.

Disappointing investment returns, high charges and plummeting annuity rates - which give you an income from your pension - have left many people unable to afford to retire. In just three years, annuity rates have fallen by more than 20%. On top of this, EU regulatory changes soon coming into effect could depress annuity income further.

And those who did not want to buy an annuity have also been hit. The maximum income that can be withdrawn from a capped drawdown fund has fallen by more than 20% in the past three years because of QE and Treasury rule changes.

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Death spiral

It is not only defined contribution pensions (the most common type of employer pension scheme) that have problems. Defined benefit schemes (the more generous type) have been hit too.

Falling gilt yields have led to soaring pension deficits. Even though companies have poured huge sums into their pension funds, the rise in liabilities resulting from falling gilt yields has led deficits to keep on increasing. This is becoming a ‘death spiral' for many schemes.

As deficits grow, companies must put more money into their pension schemes. This means there's less to invest and it weakens their business. It's a vicious circle. Compounding these problems, banks are increasingly unwilling to lend to companies with pension problems, so their business is weakened further.

Amid all these pension problems, the government has now rolled out its new policy of auto-enrolment, which will force employers to provide and contribute to a pension fund for all their workers. Some 8% of earnings will be going into a pension fund each month; 4% from each worker, 3% from employers plus an additional 1% from tax relief.

Workers are able to choose to opt out but it is not yet clear how many will do so.

Signficant changes

The pensions landscape could change significantly as a result of this new policy, but without radical state pension reform, it may not be safe to automatically enrol all low earners into a pension scheme. This is because the state pension system penalises private pension income, leaving pension savings unsuitable for large sections of the workforce.

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Worryingly, plans for a flat-rate state pension that would remove the mass means-testing of pensioners have yet to be properly put forward and there have been rumours the policy may not make it onto the statute books. Without such radical state pension reform, the policy of auto-enrolment could end up as another pension mis-selling scandal.

In fact, there could be many advantages to improving pension flexibility. Many people might be happy to start saving, but will be frightened to lock their money into a pension, which cannot be touched for decades. Policymakers treat pensions as the only worthy way to save for the future, whereas there are other valid savings vehicles that could benefit the economy.

Saving in an ISA, repaying student debt or saving for a first home could form part of auto-enrolment, but at the moment anyone saving outside a pension will lose their employer's contribution.

Making pensions more user-friendly could be a major step forward in restoring a retirement savings culture that is so urgently needed. The sooner these issues are addressed, the better all our futures will be.

Dr Ros Altmann is director general of Saga. She is a pensions expert and adviser to the pensions industry. Email her at

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