For many people these days a pension from an employer’s pension scheme could well be their largest financial asset. It is not unusual for folk to find their company pension is worth more than the house they live in.
Even the state pension, which so many regard as a miserly amount, would cost about the same as the average UK house to provide as an annuity for a 66-year-old. That’s something that perhaps those in government should shout about a bit more, although it’s probably best our politicians don’t think of the state pension in such terms.
Under 35s pessimistic about state pension future
The reality, which so few people, politicians or not, seem unable to grasp, is that pensions cost a fortune. It’s not cheap to provide people with an inflation-proofed guarantee late in life so they can leave the workforce, put their feet up and rely on the monthly income rolling in for as long as they remain on the planet.
In our modern times employers and the government seem far more concerned about the true cost of pension provision than they did, say, 50 or 60 years ago, when many of the big UK defined benefit workplace pension schemes were first established and the state pension was paid out at younger ages than it is today. The company pension schemes too, or at least the DB ones, have historically relied on the employer paying the lion’s share of the cost of provision with maybe just a fifth or so of the cost being picked up by employees.
It seems clear the pensions coming from company pension schemes 50 or 60 years hence will likely have been funded more equally between employers and employees, and will be less likely to be so generous as the pensions being paid out to company pensioners today.
The past of UK workplace pension provision was really all about incentivising employers to provide and fund company pension schemes. The future will be more about incentivising employees to forego consumption and put more away for the future.
It’s time to push pensions forward
That is completely different and much harder to do, particularly as pensions legislation is mind-bogglingly complex and is barely understood by anybody in the country.
It is difficult to see how tens of millions of employees will ever be persuaded to defer income and save vast amounts of money into something they cannot properly understand and have so little control over. So difficult, I would say, that it is highly unlikely to happen.
If that is right then the workforce of the first half of the 21st century will have a completely different experience in their old age, with regard to pensions, from that of the workforce of the second half of the 20th century. The days when people’s pensions might be worth more than their houses may soon become a thing of the past.
Steve Bee is director of OpenMoney Benefits
Once Mr Sunak has finished cancelling higher rate relief pensions will look very sick indeed. Those in the 40% tax bracket and above contribute most into pensions. (They also happen to pay the most tax). If they are only to receive 20% relief I would guess that many will turn to other ways of saving. Thus leaving the pension companies with the smaller premiums and auto enrolment, on which they make precious little margin.
So Steve we’ll probably meet at the pensions funeral.
The main reasons why employers and the government are far more concerned about the true cost of pension provision than they were, say, 50 or 60 years ago are that annuity rates have bombed, people are living longer and, as more and more DB schemes fail, the costs for all the others of funding the PPF to bail them out are going up and ever up.