Adrian Boulding is Legal and General’s Pensions Strategy Director; Annie Hayes spoke to him about policy, solving the pensions’ crisis and what HR can do to educate workers about saving for the future.
How did it happen?
Few will have missed October’s revelations. British workers face a pensions’ shortfall of £57 billion a year. I asked Adrian Boulding how such a state of affairs could have arisen.
“There are two issues that have contributed to the shortfall. The first is increased life-expectancy. The basic problem is that pensioners are living much longer than they were. The second is the size in fall of the stock market – it was a lot more than many had expected.”
A demographic cocktail in which we live longer but have fewer children has proved to be a big hangover for pensions.
Simply put the proportion of retirees to workers is now top heavy. While this places a growing burden on the state, company pension schemes are becoming less generous and final salary pensions are being slashed as businesses recognise that people are living too long to make these types of schemes economically viable.
Who’s in trouble?
High-income earners and those who have saved consistently throughout their working careers are looking at a bright future, so who will dip out?
Adrian Boulding told me that anyone ‘not’ in a final salary scheme may need to re-think their retirement plans.
“Final salary pension schemes place the burden on employers. Many public sector workers and long-serving employees in the private sector will be in a final salary scheme. The rest are probably in money purchase schemes but are probably not saving enough.”
In 2002 the Government published its Pensions Green Paper which sought to raise retirement ages in the public sector from 60 to 65, and to increase the age at which people could take early retirement from 50 to 55.
In addition, plans to slash final salary schemes for thousands of civil servants have been met with anger by trade unions and workers alike.
Despite the warnings, recent findings show that approximately 4.5 million are turning their back on company pension schemes.
How much is enough?
We now know that we are not saving enough, but how much should we be putting aside.
“The rule of thumb I use which has been dubbed by colleagues as ‘Boulding’s Law’ states that you take the age at which you started contributing and divide that by two. You should then pay in that percentage of your salary for the rest of your working life. So if you start your pension at the age of 25 you should pay in 12.5%,” explains Boulding.
What is the best ‘savings’ option?
In his report Adair Turner presented three options for plugging the pension’s gap.
1. Raise taxes
2. Save more
3. Work longer
I asked Adrian Boulding what he feels is the best solution.
“In the first instance, I would say we should save more. Saving is highly effective – pensions are still the most tax efficient vehicle. If you save a pound, it costs you just 78 pence of take home pay. My second preferred option would be to work longer. What I expect we will see is a ‘downshifting’ into retirement. As people reach pensionable age they will go part-time into retirement to keep some money coming in.”
Is the Government doing enough?
“No they’re not because the shortfall is getting bigger. The Association of British Insurers calculated three years ago that the gap was £27 billion a year the Turner report said last October that this figure is now £57 billion.”
So what has been achieved?
Boulding points to three areas:
1. Tax simplification: the administrative costs of running pensions will be reduced as of April 2006
2. ‘Informed choice’ pilot programme: the Department of Work and Pensions have pinpointed businesses where there has been a low-take up of schemes and have worked to produce better written materials to educate workers on the realities of pensions
3. SMART: ‘Save more tomorrow’ these schemes are aimed at helping organisations where there is a good take up of pension schemes but it could be better. The approach they take is to get workers to commit to paying more towards their pensions mid-year before their pay rises.
Can businesses do more?
“They have been restricted in part by the stakeholder pension rules. Under the current FSA regulations, employers are prevented from promoting their stakeholder chosen scheme. This rule will be changed in spring.”
Communication and education, though, are key adds Boulding.
Are stakeholder pensions helping?
Stakeholder pensions were introduced by the government to encourage low-income earners to save efficiently for their retirement. The problem, however, has been that bosses aren’t compelled to contribute to them.
The Adair Turner report revealed that just 4% of small employers pay any cash into these schemes.
A finding which Boulding supports: “What we’ve learnt is that the employers’ contribution is key. The data speaks for itself. Where an employer contributes to a stakeholder scheme, the take up is 70% where they don’t it is just 13%.”
Boulding tells me that in his opinion the government won’t make employers contribute to stakeholder schemes in the future, however.
“The scheme was designed to help the most seriously disadvantaged. Those on really low earnings tend to work in the black economy, have broken career patterns and are only employed some of the time. If you’re working in the black economy, compulsion doesn’t help you. The most needy must be addressed by the state.”
Is there still a case for the state pension?
“Very much so. It needs reform, however. I think entitlement should be automatic and given to anyone who is a resident.”
Currently there are significant numbers who don’t qualify. Boulding explains that as many as 40% of women and 10% of men are missing out.
On the issue of contracting in or out of the state earnings related pension scheme (SERPS) Boulding tells me: “What I would say is that if you’re going to do it don’t do it for profit. Rebates are less generous now. If you do it because you prefer to have a private pension over that of the state then that is fine.”
Are pensions the only answer?
Pensions are the best solution according to Boulding.
“They are the most tax efficient form of saving so in my opinion they are the best retirement option. When I meet people I am quite bullish. Most people thoroughly enjoy retirement, but it has to be well financed. If I meet a young person I encourage them to divide their savings into three:
- Rainy day: these funds are for when things go wrong, if your car breaks down for example
- Sunny day: these savings are to help you get ahead like a deposit on a house
- Twilight day: for retirement!”
With the pensions’ crisis clearly getting worse, workers could do worse than take matters into their own hands. Following ‘Boulding’s rule of thumb’ when calculating how much to save seems a good place to start.
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One Response
Save More? With Whom?
All very well, but where people have used the institutions, Legal and General included, for non-pension savings products such as endowments. the performance has been less than exciting; in many cases people have had to augment their payments to ensure that their mortgage liabilities are met at the very least.
It seems that more people will have to take responsibility for their savings, and not entrust them to so-called “experts”.
The one question that no-one in the Financial Services industry has satisfactorily answered is why only 3 years of a Bear market can more than cancel out the effects of one of the most prolonged Bull markets ever seen.