AUSTERITY IS MAKING MORE PEOPLE CONCERNED OVER THE FUTURE OF THEIR PENSIONS. | EPA/ANDY RAIN
UK tackles pensions and grey power
In the UK, pensions have triggered a more contentious debate, as new regulations change the landscape of how pensions will be delivered in the future, and when they will be received.
The Conservative-Liberal coalition government, since they took power in 2010, have put their foot on the peddle of pension reform, which will effect the public and the private sectors.
Currently there is a draft pensions bill, which could bring forward the new state pension age of 66 rising to 67 between 2026 and 2028, replacing the previous law that stated the pension age would increase between 2034 and 2036. The speeding up of the rise of the pension age is the predictable response to an aging population, where the government argues that the average 60 year old is expected to live ten years longer, when compared to someone of the same age in 1970.
Another major reform of the state pension is the ‘single tier rate’, that will replace the current system of a basic state pension, which is then increased by calculations on lifetime contributions and means tested benefits.
This will be implemented at the earliest in 2017, with the objectives for the change based on simplifying the state pension by removing means testing, and to equalise the age of receiving the state pension between men and women, with a qualifying period of 35 years of social insurance contributions.
The government say they will set the rate of the single-tier pension higher than the means tested support version, incorporating an uprating triple lock system based on highest earnings growth, consumer index growth, or a basic 2.5% increase. James Walsh, senior policy adviser, for the National Association of Pension Funds, said: “We are supportive of this measure, as this is a simplified way, which is far less complicated than the endless benefits that people could receive. This should ensure that people receive more than the pension guarantee level, and it rewards savers with the incentive to build up their own savings not being subjected to means tested ways.”
Reforms to public sector pensions have courted the most controversy, even causing street protests, which are not as easily provoked in the UK as countries such as France and Greece. The Public Service Pensions Bill is also currently in the processes of the UK parliament, and the aim is to create a career average scheme in the public sector that will end the final salary system, where pensions are paid based on longevity of service and end of career salaries, a system usually used in the public sector and is thought by the government to be costly.
The argument being this way would create the incentives for the lower earners to enter into pension schemes.
Contributions from public sector employees will also rise to reduce the burden on taxpayers as part of the austerity drive, chancellor George Osborne stated this during the dramatic 2010 spending review, where he wanted to save £2.8 billion from public sector pensions by 2015. Changes made to teacher’s pensions have already been made, from the 2012/13 financial year, contributions from those earning between £15,000 and £25,999 will increase by 0.6% per year, and for those whose salaries reach between £26,000 and £31,999, pension payments will be increased by 0.9%.
The lack of enthusiasm for participation in private pension schemes is palpable, as figures from the UK’s Office of National Statistics show. In 2011 there were just 2.9 million who were contributing to workplace pensions, a record low since records began in 1953.
A report by the annual Occupation Pension Schemes survey blamed the lack of defined benefit pensions, with defined contribution schemes offered more, where returns being related to the performance of the markets.
In response to this, the government from October last year introduced automatic enrolment, where the employer is responsible for choosing a pension scheme for employees, where qualifying earnings are between £5,564 and £42,475 a year, or the employee’s entire salary before tax.
These can be defined contribution or defined benefit schemes, although the latter is becoming more rare, the plan is that by 2018 automatic enrolment pensions will be funded three ways. These are through minimum payments from the employee reaching 4% of his or her qualifying earnings, joined by the employer contributing a minimum 3% of the qualifying earnings, and the government a further 1%. Although dependant on the scheme what the employer and employee pay can be variable.
It is hoped that this change will be the shot in the arm needed to boost apathetic rates of workplace pensions.
“It is a good start, and its very welcome” James Walsh reflected. “The pressure will be there to ensure that there will be good workplace schemes in place, as I don’t think that the minimum 8% funds will be enough, most of the pension schemes offered will be defined contribution ones rather than defined benefit as that is the current trend.”
Looking at where UK pensions are invested, which with 9.3% of the global pension asset market is the third biggest in the world after Japan and the United States, shows some changing trends according to the Tower Watson Global Asset Survey released last month.
Equities are still the largest investment area, with 45% of UK pensions traded through them, and 37% being invested in the bond market, although the growing trend is investment in ‘other’ areas such as the alternatives market including hedge funds. Compared to ten years ago, equities commanded 16% more of the UK market ,with less conventional ‘other’ investments involved in just 3% of pensions say Tower Watson.
“There are regulatory aspects, such as Solvency II, that will prolong pushing pension schemes into investing in the bond market and into lower risk plans, but as gilt yields are low there are alternatives such as investing in infrastructure, so the patterns that are emerging over investments may continue.” Walsh explained.
As pension regulations continue to be debated, them full picture is still yet to emerge, expect more policy shifts and controversy in the future.
ABOUT THE AUTHOR
Peter Taberner has previously written for Financial News, Investment and Pensions Europe, Utility Week, EGOV Monitor, European Pensions, Suite101.com, PPP Bulletin, Global Pensions Weekly, Tobacco Journal International, IPS and Seeurope.net.
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