Two-thirds of employer pension schemes have closed their doors to new members, while a tenth have stopped new accruals. Younger people, in their 20s and 30s, are making no Advertisement
provision for retirement. At that age you feel immortal and money goes on priorities that seem far greater.
Yet there is one chunk of the population snug in its pensions' cocoon: the public sector. Be they civil servants, local authority staff or soldiers, lavish resources clock in once they reach 60 or 65. They have gold-plated, tax-funded, index-linked security as the rest of us float off free and confused. It is a curious paradox that a government wanting to unite us in benevolence should create two castes: the well-pensioned and the non-pensioned.
All sorts of questions need to be asked. Not many have obvious answers. Are we seeing the complete dissolution of private sector company pensions? Will non-civil servants have to save for themselves in personal isolation? Is this not contrary to human nature? Will real penury not engulf those who live longer than anticipated?
A huge degree of risk is being imposed on those not outside the public sector. I can find no indication of coherent thinking about this from any branch of the government. The only contribution has been to tax private pension funds to make annuities even more difficult for those retiring in future. The rules for taking annuities themselves seemed locked in a past when most had expired by 70.
Pensions can represent a subtle form of serfdom. We all know friends or neighbours who have lingered in jobs they hate to maximise their pension fund. This used to be true of corporate pension schemes too, but as they close down the phenomenon of people lingering in roles they loath is becoming a distinctly public-sector feature.
Apart from marriages and mortgages, pensions are the longest-term contracts we enter into, yet it is far from easy to be responsible let alone comprehending. The nature of compound interest is such that we ought to save most early in our careers. Yet these are the years we have children and their related costs and our home loans loom large.
Those locked outside the luxury of civil service pensions suddenly panic in their 50s and try to build pots of capital to keep warm when working ceases.
There is the state pension, but that offers only a modest cushion. Britain is singular in the shrivelled nature of its state pension compared to the other European Union nations.This is probably to our advantage as continental nations face huge rises in taxes to fund the retired. Yet what are those with little or no savings to do?
Edinburgh has a huge concentration of fund managers. I rarely understand what they say as I don't speak algebra. Everyone in the pensions business seems to have an alien patois of technical gobbledegook. What I can see is that after a sustained bull market in equities since 1980, most private pension funds are part of the aggregate deficit of £100 billions. For all their expertise, they believed far too much in shares. Members retiring now have more modest resources than they were led to believe.
The parable that illustrates the flaws in the pension craft is the near evaporation of Equitable Life - taking down all those professionals who thought they were wise and secure to save with this once illustrious mutual fund. Equitable Life was tripped up by two hazards it might have foreseen: interest rates staying low as inflation stayed low and lawyers capable of creating a catastrophe out of a minor headache.
The defined benefit company pension scheme only ever made sense if you worked throughout most of your career for one employer. That applied to many 30 years ago. Now only the most inert and less venturesome will expect to stay with a single company. Even they are not safe. Such is the flux of the market that your employer can be gobbled up or cease to trade.
The assumption that others will save for our old age is now threadbare. In future, we must all learn to save for our extending years of post-income life. The government, by which I mean the Inland Revenue, needs to cajole everyone to save more. I stop short of commending coercion but pensions, which might be termed "long-life insurance" ought to be near-obligatory.
I have seen some contemporaries put their child allowances into pension funds. It is deceitful, but it makes good sense. I have seen others reach retirement age and simply conclude that they must press on at work, although they might try to abandon the drearier tasks and concentrate on those they enjoy. I think this is a benign new factor. We all know those who have died within months of retiring. Purposelessness is bad for the soul and deadly for the body.
Others responding to a poverty that hadn't reckoned on are moving abroad; even a tiny UK state pension gives you opulence in other locations with plenty of sunshine. Others are pooling their households and creating their own tontines. Eight retirees, with their spouses, can retain larger homes and afford help. I know others who have moved into annexes of their children's homes, serving as babysitters and making a sort of career out of grandparental duties.
Chancellor Gordon Brown's decision to start to tax pension fund dividends in 1997 may be an elegant fiscal policy, but it seems tyrannical to levy from the entirely defenceless who had thought their savings were tax-exempt.
Brown's initiative will eventually illustrate the iron logic of Blundell's Law: all political interventions achieve the opposite effect. Brown, having depleted pension fund dividends, may have to pay for the care of those rendered so much poorer by his action.
In one glorious sense we can see the great rationality of the market: all those pension fund managers experience their funds diminish, but individuals find their homes represent new riches. The owner of the most ordinary bungalow has invested more successfully than the top-performing money manager. Yet the surge in property prices is no more than a device for switching costs from the older to the younger. Those joining the housing system have to buy out the present owners - the older.
Company pension schemes were a dud idea. They are as daft as the idea that we should live in a company house or send our children to company schools.
We should all be grown ups and look after our own funding and savings. Company schemes present a huge set of conflicting interests between the shareholders and the staff and even between managers and the employees.
The notion of corporate schemes was partly old-fashioned benevolence but largely to retain key workers. Companies are transient entities. They are not there to be trustees for their workers' old age. Some seem to regard money saved as being locked out of the productive economy. The savings will have to be invested. Such savings will re-fertilise economic activity. Saving for our retirement is not merely self-interested, it enhances wider investment.
Edinburgh's pensions experts often seem gloomy at the closure of old-fashioned company pensions, yet it is a wonderful opportunity for them. Husbanding our main investments ought to create opportunities.
I doubt if we would be wise to put all our savings into the custody of a single fund manager, but one will probably enjoy our trust and affection. We are free to make our own investments in shares or antiques or second homes, but the tax system ought to smile upon those who save coherently.
Saving over a long horizon - a lifetime - is to carry risk. The entire purpose of Scotland's fund managers ought to be to buffer these risks. This means diffused and diverse investment. The death of the company pension scheme can be applauded, but how odd the government barely has a policy for those who are not civil servants.
I suppose neither Tony Blair nor Brown barely talk much to anyone who is not expecting an opulent public sector retirement. MPs are snug. So are our MSPs and MEPs
John Blundell is director general of the Institute of Economic Affairs
By: JOHN BLUNDELL -- 02-Sep-04