1950 s 2000 s. Birth. Birth. 15 years not working years not. working. 42 years. 50 years. working. working. 22 years not working 84

Transcription

1 The Pensions Crisis Funding Old Age CCW Pensions Lecture 3rd May 2012 Dr. Ros Altmann

2 Outline Some great news What went wrong? Impact of economic crisis on pensions crisis Reforms on the horizon Solutions for funding later life not just pensions 2

3 Great news We re living longer, healthier lives Most of us not old in our 60s any more Huge medical advances give decades more life Employment entails less physical toll on workers Opportunity for better quality of life 3

4 1950 s 2000 s Birth Birth 15 years not working years not working years working 42 years working years not working 33% years not working 84 50% 50% 67%

5 So what went wrong? Pensions crisis Pension, employment & retirement lagged behind our lives Retirement lasting too long even early retirement! Too heavy a burden on pensions relied on equity returns! Paying more people not to work, damages long-term growth Pensions ignored risks and demographics 5

6 Population age 65+ soars from 2012

7 Funding old age Retirement income from Government (i.e. taxpayers) Our employers (company pension arrangements) Ourselves All three sources under pressure State pension too low, too complex, too much means-testing Employers cutting back Private pensions disappoint investment, charges, annuities No savings for care needs and councils cutting costs Individuals in trouble: pensions crisis, pensioners crisis 7

8 Traditional pension schemes Paternalistic employers help loyal lifelong workers Workers relied on employers Employers relied on stock market Originally, best efforts Now, enshrined in law, on balance sheet + Solvency!! Unsustainable, muddled thinking 8

9 What is a pension 1. Social welfare: state support? 2. Long-term savings: private sector? Final salary schemes tried to do both State shifted social welfare burdens onto employers Schemes forced to cover spouse, deferreds, inflation Government cut state pension Pensions crisis and mass means-testing 9

10 Final salary schemes finished DB does not fit 21 st century capitalism End of lifelong employment Costs >30% of salary Corporates can t be relied on for 80 years Closed to new members means scheme is finished! Looking to buy-in then buy-out 10

11 Pensions don t grow on magic trees Pensions can t just keep lasting longer and longer Lack of understanding about pension costs and risk Unrealistic expectations didn t budget for poor returns Financial reality assumed away Moving to DC and annuities 11

12 Move to DC Switching to DC puts all risks on workers Risks on employer too high equity returns cant cover Longevity Investment Regulation Charges investment and administration Salary inflation Price inflation Interest rates or annuity costs Individuals are not prepared 12

13 What will happen to DB schemes? Some move to career average, higher pension age, cpi Deficits and investment problems Danger of PPF Pooling of schemes More creative investment ideas Funding economic recovery?! 13

14 Impact of economic crisis even worse Low interest rates followed by QE QE disaster for pensions Buying gilts increases deficits and annuity costs 1% fall in gilt yields leads to 20% rise in liabilities!! 2007/08 15 year gilt yields >5%, now, 2.5% = 50% liabilities rise Created inflation further cost increases Schemes can t hedge inflation or longevity properly Bank of England and Regulator must not ignore this! 14

15 QE has damaged annuity rates Gross income p.a. Annuity Income and Gilt Yields 7,000 Annuity Rates (left axis) 6.00% 6, , % 5.50% 6,600 Gilt yields (right axis) 5.00% 6,400 6, % 6,000 5, % 5, % 5,600 5, % 5,400 5, % 5, % 04/ / / / / / / / / /2011 Male age 65, Female 60, 100,000 purchase, joint life 2/3rds, guaranteed 5 years and level payments Source: Better

16 Pension reform on the cards Radical change to state pensions perhaps? Simple 140pw state pension, end mass means-testing State pension won t penalise private pension or earnings Auto-enrolment into workplace pensions starts 2012 Massive change But this won t be enough to solve old age funding crisis 16

17 Future of NEST One hand tied behind its back Competition from NOW and People s Pensions Repay Government loan? Charges 1.8% up front Contribution limits, transfer ban, short service refunds And what about decumulation?? 17

18 DB => DC => DA?? Auto-enrolment not enough Uncertain outcomes, need more than pensions Pure DC won t fix inadequate long-term saving Government suddenly urging employers to backtrack DA - Defined Ambition!! 18

19 Pensions can t solve pensioners crisis Just putting money in does not guarantee money out Keep planning flexible ongoing review And what about care costs? Incentives for care saving and maybe equity release Cap care costs so people won t lose everything - Dilnot Need new thinking 19

20 Radical reform for the future Abolish the word pensions Loss of confidence in locked box Flexibility Lifetime Savings Auto-enrolment to ISA or pension Leave employer money/tax relief locked, access to rest 20

21 It s not just about pensions or saving Where will later life income come from? State Pension only a low base Another Pension (employer or private) ISA Care saving plans House equity release Business Working longer No fixed future reassess regularly No magic age 21

22 Rethinking Retirement Must have more flexible later life planning Individuals to take responsibility: advice, financial planning Need more than just pension, consider care Social revolution with a whole new phase of life Bonus Years Cut down gradually, work part-time time 2-3 days work, 4-5 days off, more money 22

23 Now Future? years not working years not working years not working 50 years full time work 42 years full time work 42 years full-time work years retirement years retirement 62 72? 10 bonus years Part-retirement 22 years Full-retirement 33% 92 51% 49% 45% 67% 55%

24 Conclusions No longer enough to rely on state or employer pensions No guarantees, we re on our own plan for our future Diversification, flexible plans for later life income Pension and saving is only one part of the solution Rethinking retirement bonus years Understand reality and embrace new opportunities 24