SAVING FOR retirement in an uncertain economic climate, where incomes are falling and unemployment is rising, presents a stiff challenge. Yet without making better financial provision, retirement will become a grim prospect for some; one more to be feared than enjoyed as they experience a sharp fall in their income.
At present half the workforce is solely reliant on the State pension in retirement. The Government, in presenting its National Pensions Framework document yesterday, set out the nature of the challenge that an ageing population presents as people live longer and the cost of pension provision soars. The demographic projections underline the problem’s scale. In future there will be far fewer in the workforce to support those of pensionable age. Today six people of working age support every one aged over 65, but by mid-century there will be two people in the active age group for every one in retirement. For taxpayers that would be an unsustainable burden. By 2050, State spending on pensions will account for 15 per cent of national income, a threefold increase on the current share.
In its framework document, the Government has outlined how pensioners can and will be protected and how it aims to keep the value of the State pension at 35 per cent of average earnings. It has also proposed a supplementary, mandatory, pension scheme, in which low and middle-income earners will be automatically enrolled – but from which they can opt out. Employee, employer and the State will make matching contributions with the aim of giving those employees not already members of an occupational pension scheme additional retirement income. This initiative will help increase pension coverage and also introduce greater equity into pension provision by equalising the tax treatment of contributions to all occupational and personal pension schemes.
Past efforts to encourage people, particularly low and middle income earners, to invest in personal pensions have failed. International experience suggests that the mandatory scheme stands a somewhat better chance of success.
In the context of major pension reform, it is unsurprising that the Government has decided to raise the retirement age to 66 for State pension purposes in 2014, 67 in 2021 and 68 in 2028. It reflects what many other European countries are doing: with Britain planning to increase the retirement age to 68, while Spain, France, Germany and the Netherlands have either decided to do so or are considering the matter. At a time of rising public debt and substantial budget deficits, most governments want to reduce the pension burden on the state and raising the retirement age represents one of the better ways of doing so.
Given the constraints imposed by the public finances, pension reform was never more necessary. But by taking three years to decide on a National Pensions Framework, the Government has made the challenge of selling its proposals to the public a difficult one in current economic conditions.