The unpalatable truths about pensions reform


Figures published this week highlighting the stubborn reluctance of many workers to save for their retirement means governments and employers are going to have to think much more radically and harshly about how to solve the pensions' crisis.

Politically unpopular solutions such as compulsion or even creating a new pensions model of "presumed consent" may have to be considered if the UK and other countries with ageing populations are not to face a retirement catastrophe in years to come.

In a sign of just how jittery politicians are about this issue, this week British ministers were forced to backtrack smartly after Pensions Commission chairman Adair Turner suggested graduates may have to be compelled to work to the age of 70.

Evidence also emerged this week that UK employers are continuing to close generous final salary schemes, with just 35 per cent offering such schemes, compared with 40 per cent last year, according to research from financial advisers Origen.

But perhaps most worrying was a study from actuarial advisers Hewitt Bacon & Woodrow that found fewer than half of all workers eligible to join a company pension scheme have done so.

British workers have lost faith in occupational pensions, final salary or otherwise

British workers, it concluded, have lost faith in occupational pensions, final salary or otherwise, with take-up rates in larger companies deteriorating most sharply. Employee savings had also remained static.

The headache, then, facing governments and employers is that if occupational pensions – which effectively offer free money from the employer – are not enough to encourage people to save for their retirement, what on earth is?

"What do employers have to do to entice people to join? If you give someone a 7 per cent pay rise they will jump at it, but if you say you are going to add 7 per cent to their pension they are reluctant," complains Chris Cairns, pensions' specialist at Hewitt.

Workers, it appears, simply do not want to accept that the state may not be able to support them in old age. They may know deep down this is the case but, perhaps struggling with mounting personal debt and mortgage payments or simply preferring to spend money today, they remain wilfully blind.

"Employees still have not recognised that in the vast majority of cases the onus is on them. They still feel someone is sorting it out for them and will be looking out for them," worries Cairns.

Even if workers do sign up, they often forget about their pension or assume it is doing fine, only to discover when it is too late that they should have been putting more aside, she adds.

"Employers have done a reasonable amount to communicate things. It may be, though, that people are being asked to sign up to pensions at the wrong time, when they are joining the company and are already drowning in paperwork. They then put it to one side and the form never gets filled in," suggests Cairns.

Companies that use a "presumed consent" system whereby employees are signed up unless they say otherwise do appear to get better results when it comes to overcoming the complacency and apathy problem.

But the way pensions are modelled means this approach is only possible for trust-based pension schemes. If a firm offers, say, a stakeholder pension, the employee physically has to sign a contract to opt in.

Even compulsion may not work, if current attitudes persist. If the Government decides that forcing people to pay is the solution, setting a contribution level that is politically palatable may mean it ends up being so low as to make no real difference, suggests Cairns.

The extra taxation route is, of course, equally unpalatable politically.

The longer term worry for managers is that, if their workers reach their sixties only to find out they cannot afford to retire, they will inevitably want to stay put.

This is turn will create a whole host of new of workplace problems surrounding recruitment, discrimination, management and occupational health.

It is a scary but very real prospect – and perhaps that is why we prefer not to think about it.