No panic about pensions?

Oct 31 2005 by Brian Amble Print This Article

Far from individuals having to work until they drop to make up for a multi-billion pound pensions "black hole", a new report argues that there is no pensions crisis in the UK and that the country can well afford to grow old.

Tomorrow's Company, an independent business-led think thank, has attacked the assumptions which have created a sense of crisis around pensions, arguing that increases in productivity will negate the negative effects of demographic change.

"There is no ageing crisis," said Philip Sadler, one of the report's authors. "As a society we can afford to grow old. Rising productivity will outweigh any negative influence on living standards from an ageing population."

The report, "The Ageing Population, Pensions and Wealth Creation", says that comparing the total number in work (as opposed to the number aged over 65) with the number of people who are not working suggests that the economic support ratio is unlikely to be greatly different in 2041 than it was in 1961.

Meanwhile, if productivity grows at even 1.75 per cent per year - lower than recent trends - the average British worker will produce twice as much goods and services in 2045 as they do now. This makes any plausible change in the total economic dependency ratio easily manageable, it argues.

This rising productivity means that a universal taxation-funded state pension that ends means testing and contracting out becomes economically feasible Ė if the political will can be found to unpick the current maze of complexity.

But as the report also points out, the government needs to ensure that the UK's economic framework encourages growing productivity, while it must also remove barriers to more widespread saving and working longer - for example by abolishing means testing and getting away from the all or nothing assumption which dictates retirement at 65.

There is an onus on business, too. "Managers and owners of companies will have an increasing responsibility to run their businesses in such a way as to create the wealth underlying future pensions, even as defined benefit pensions decline in importance," the report says.

Alan Pickering, a partner of pensions consultants Watson Wyatt who contributed the foreword to the report, said: "When it comes to pensions, wealth creation is far more important than wealth distribution. We need a modern labour market which provides lifelong access to learning, which is the key to lifelong earning opportunities.

"As it is, we are still pensioning people off in their prime."

Since it is impossible to forecast accurately what the UK will be like 30 to 40 years from now, the report argues that it is dangerous to draw up a pensions regime that supposedly anticipates how society will look in 2045.

"Provided that there is no major shock to the economy in the immediate future, we can do the sums for the next five years and begin to learn about adapting to the increase in ageing," added Philip Mullan, one of the report's authors.

"We can repeat the process each quinquennium thereafter and so on until the baby boom bubble has subsided."