IT seems the world is not short these days of opinions about what the future might hold.
Much of the discussion, when it comes to the economy, is based on the rapid pace of technological advance. For anyone interested in corporate jargon bingo, we have had such banal additions as “change is the only constant”. And we hear plenty about how many of the jobs that people will be doing in future do not yet exist.
Technological change is undoubtedly rapid, and having a huge impact in every aspect of people’s lives. And some jobs, in the likes of the digital sphere, did not exist before.
However, amid the growing obsession with change, we must not lose sight of the fact that certain crucial fundamentals do not change.
One such fundamental truth is that, for a healthy society and economy, people need a decent income in their retirement. And, while much of so-called futurology might by its very nature be a bit pie in the sky, it would hardly take a rocket scientist to work out that we should be worrying seriously about the lamentable demise of final salary pension schemes.
There has been much public policy focus on increasing the number of people paying into a company pension scheme through auto-enrolment. However, while it is to be welcomed that more people are paying into pension schemes, such defined contribution or “money purchase” arrangements are far from ideal in terms of contribution levels from companies.
Also, in money purchase schemes, the value of a pension is at the mercy of the markets and employees bear the investment management fees.
And, crucially, given the backdrop of rock-bottom inflation, interest rates and low nominal investment returns, even the less stingy money purchase arrangements look highly unlikely to ever pay out anything like the pre-determined retirement income from a final salary scheme.
As we contemplate what the future might hold for a UK economy without its troubles to seek in the short term, we must recognise that the sorry decline in the terms of employers’ pension provision is likely storing up huge problems for future decades.
You might be forgiven for not realising this, given all the rumours ahead of the Budget that Chancellor George Osborne might effectively take many billions of pounds each year out of pension savings by cutting back on tax relief for contributions.
The sorry fact of the matter is that we face the prospect of many more millions of people retiring on paltry pensions, and with little money to spend, than is the case now.
Many will also have no leisure time as they have to keep working just to make ends meet, in who knows what kind of job. DIY chain B&Q has, rightly, been praised for its efforts to hire older workers. However, it will take more than even a spectacular DIY boom to provide enough jobs for hard-up pensioners who will have to keep on working.
Although there have been huge numbers of final salary scheme closures, the true impact has not yet been felt. Millions of people retiring now will still have good final salary or defined benefit pension scheme arrangements, even if they have been pushed into money purchase arrangements for the final years of their employment as companies have looked to reduce dramatically the cost of retirement benefit provision.
While low inflation, interest rates and investment returns, and increased life expectancy have accelerated the demise of final salary pension schemes, so has companies’ focus on shareholder value at the expense of other stakeholders. Not to mention executives’ desire for fat bonuses which are often the reward for ill-judged cost-cutting.
In future decades, many companies are likely to feel the pain of sharply-reduced retirement incomes for many people in the UK. You would imagine supermarkets would be hit, as people are forced to cut back further on food bills, and restaurants will face the prospect of fewer pensioners being able to eat out with any kind of frequency.
Many pensioners who might in the past have taken a budget package holiday to Madeira or Spain will no longer be able to afford to do so. There will also be fewer better-off pensioners for the likes of cruise operators to target.
And what does the future hold for young people who not only face reduced pension provision but are also currently priced out of the housing market, or saddled with a mortgage that will absorb a huge proportion of lifetime income? That is before we even get to the eye—watering university tuition fees being charged south of the Border, and what happens in future in this area.
Hopefully, Mr Osborne and his successors will resist any temptation to tinker with pension tax relief in future – things are bad enough as they are with the decline of final salary schemes.
In the public sector, we have seen workers moved on to career average salary scheme arrangements for pension provision, although these certainly seem preferable to the vast bulk of the money purchase plans which now dominate the private sector scene.
Envy from some parts of the private sector towards public sector pension provision is utterly regrettable. These pensions are neither “generous” nor “gold-plated”, as some of the private sector finger-pointers would have us believe. Rather, for the vast majority of public sector workers such as teachers and nurses, they provide what is an adequate level of income in retirement.
Surely adequate is a good thing?
The danger of losing sight of the long-term picture for pensions, and the importance of adequate provision, is almost certainly heightened in protracted difficult economic times like those we are in now. But, if we do not focus on the long term, the economic situation could well be even more miserable in decades to come.
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