Ronald Bowie: Wrong time to gamble with your pension
YOUR first day at work is a big milestone in life. After spending childhood, adolescence and early adulthood working your way through your education, setting off into the big, bad world of work is an intimidating prospect.
There is so much to think about. What will your workmates be like? What will your boss be like? When will you get paid?
Even although I joined the financial services industry in 1976, I didn’t spend my first day at work thinking about pensions. However, I was offered membership of a scheme which, I was told, would deliver two-thirds of my final salary and to which I didn’t have to contribute a penny. It seemed like free money, so I joined. (As it turned out, I left four years later and got nothing. Like many people, I found the “generous pension” was illusory).
Much as changed since then. Our economy has suffered turbulent times, the “job for life” culture has gone and, crucially, we are living a lot longer than in the past. Many companies have found the burden of pension promises they made many years ago are weighing them down and the cost of repairing their pension funds is limiting the number of jobs they can create. Responsible employers are prepared to contribute to a pension but they want the risks to sit with the employee. But many private-sector employers contribute nothing. Only a lucky few have substantial pensions or savings to draw on.
As a result, more and more workers approaching retirement will have to rely on a combination of their pension from the state and continued working (often part-time) for most of their income in their retirement years. For them, the ability of their government to support the pensions’ system is the most important reassurance they can have.
This week the issue of pensions became a part of the debate on Scotland’s future, thanks to the Cabinet paper from John Swinney that made its way into the public domain. This opens a vital discourse about how we pay for an ageing population, an issue important to each and every one of us. Here, in the United Kingdom, we have learned the hard way how to build a sustainable pensions system. We have made mistakes, not least that, through well-intentioned efforts to make pensions better, we have actually made them unaffordable. Some people, through no fault of their own, have lost out completely, or are getting a pension nowhere near what they thought they would receive. We need to learn and rebuild. And this process is well under way.
The system that is now being built in the UK offers a better combination of fairness, sustainability and predictability than most other countries in both the developed and developing worlds. Other countries may well look back in 20 years’ time and wish that they too had taken the often difficult steps we have taken in the UK.
The most important element is the state pension, the foundation upon which everything else is built. Within a few years we will have a basic pension that is linked to the cost of living and is payable at a stated age which rises as life expectancy rises.
We now have compulsory enrolment into pension schemes, to which the employer/employee and government will all contribute. We have a National Employee Savings Trust (NEST), a not-for-profit body that provides a simple, accessible and trusted home for our pensions. And we have a system of pension protection in place that means, even if your employer goes bust, you will still get most of what you were entitled to, with the compensation costs shared among all the UK’s other schemes.
It is not a system that is going to make anyone rich, but it will deliver, will stand the test of time and provides incentives and confidence for people to plan for their own retirement. It is a pensions’ system that doesn’t over-promise and is realistic about what can be delivered. This will, I believe, provide people with the reassurance that, when it is time for them to retire, the benefits they thought would be there are actually there.
Given all the pain and cost the UK has been through to get to this point, why would Scotland want to invest in something else? How could we afford a protection system in which the much smaller number of schemes based in Scotland paid compensation for those that go bust?
Others will debate the future of our oil revenues, whether our economy is sufficiently diverse to be able to ride out the storms which will undoubtedly affect us some time in our working and retired lives, and how the currency question is best resolved.
Looking at the basic arithmetic around pensions, an independent Scotland is at a disadvantage on several counts. The first of these is demographic. The ratio of people receiving a pension compared with the percentage in work is rising. This will put pressure on public finances across the UK. However, the position in Scotland is worse with the proportion of people over pension age projected to be higher than in the rest of the UK.
And then there is the question of public-sector pensions. Although rarely as “gold plated”, as some would have us believe, they are better than almost all private-sector pensions. There are no assets to support the pensions for current and retired civil servants, teachers, doctors, nurses, police officers, firefighters and members of the armed forces.
These pensions all need to be paid from current taxes. Public servants make a valuable contribution to Scottish life and they are worth paying for. But the simple arithmetic is that, since Scotland has a higher proportion of public servants than the rest of the UK then, unless their pensions are to be lower than their UK counterparts, the bill must be proportionally higher in Scotland than in the rest of the UK.
The UK system is not perfect, nor is the system in any country, but it is built, it is sustainable and it has a broadly spread population to support it. Even if Scotland could somehow afford to replicate the system being built in the UK, the weight of numbers is difficult to overcome. The result must surely then be that we would face either higher taxes, lower pensions or a cut in spending in other areas of our society. None of this seems like something that will be to the benefit of our country.
It can take 50 years to prove a pensions’ system works, and by then it is too late to do anything if it doesn’t. In that respect, we are being asked to make a calculated gamble. The odds strongly favour staying within the UK system. Why gamble against it?
• Ronald Bowie is a senior partner at Hymans Robertson and past president of the Institute and Faculty of Actuaries
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Saturday 18 May 2013
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