Borrowing from the future and the change in pension regulation in the UK
What do you see when you look into your future? Do you see a contented older person who travels the world, snowboards in their 70s, patronises the opera and the concert halls, and lives in a lovely place with flowers (whatever you may consider to be ‘lovely’)? Or do you see yourself setting in a cold room dressed in three jumpers, not being able to afford medicine and eating hot dogs for dinner? For my part, I strive for the former and fear the latter.
According to statistics from the Workforce Retirement Income Commission we have every reason to be concerned; and not only for our personal financial destinies in the winter of our lives but also about a much broader picture. To begin with, the ratio between working and retired people is changing dramatically because of the aging of our society – if in 1910 there were ten working people for every retired person, today the ratio is only two to one; and getting worse.
This in effect means that the state pension – which many people relied on to see them through their old age albeit not very comfortably – is running into problems. To make matters worse, up to 9million people in the UK are not saving towards their retirement. Nothing, nada, zero!
Which means that a substantial proportion of the British population is headed for a very disturbing certainty of extreme poverty in retirement.
Quite obviously, this is not a sustainable situation and changes aiming to remedy it are in order. There are two ways to approach it: one is to create the conditions and leave the take up to the individual; and another one to develop regulation and policy, and introduce an infrastructure entailing compulsion. In the UK we are moving down the latter route by overhauling the pension regulation through a set of Pension Act culminating in the Pension Bill of 2011. This bill received Royal Assent on 3 November 2011 and sets out the increase in pension age (from 60 to 65 for women and from 65 to 68 for everyone) and implements the auto enrolment pension provisions.
Increasing the pension age is something that in many countries sent employees protesting on the streets; there were large demonstration and strikes in Italy, Greece, France and other countries. In the UK we are reasonable people; apart from understanding that this is inevitable there was some discussion but the changes are forging ahead.
Potentially more interesting and challenging is the pension regulations for auto enrolment pension. According to this, all British employees older than 22 and under retirement age who earn £8,105 ($12,850) will be automatically enrolled in appropriate pension schemes by their employer. Furthermore, the employer is required to contribute to the pension as well. This is meant to cater mainly for lower and middle income employees who are caught up in a double forked pension conundrum: first, they are most likely to borrow from their future and forego pension saving in favour of maintaining a better lifestyle today; and second, there are hardly any private pension products for lower income people. Not to mention that the performance of private pensions has not be exactly up to par lately.
This change is phased over five and a half years and is beginning from 1 October 2012 – starting with the largest companies. So, preparations are in full swing and the Pensions Regulator is overseeing the process and ensuring compliance and enforcement.
I believe that these pension regulations for auto enrolment pension, provided they are adequately enforced, will:
- Ensure that people save for retirement;
- Deal away with the effort involved in navigating the pensions products market;
- Make sure that people do not delay pension contributions;
- Encourage employers to contribute to pension schemes;
- Offer a way forward for low income employees.
At the same time, one should not underestimate the costs involved in the process of the reform or the costs to businesses through the contributions.
I am one of the lucky ones and still have a sound employer pension scheme; one of the last perks open to university employees and rapidly deteriorating. Even so, I often spend my nights dreaming about ways to complement my pension and my days planning for and working towards this goal.
My vision of the future includes travel, summers in the sun, skiing in the winter, winning a marathon at 80 and certainly more than hot dogs for dinner. If you want a comfortable retirement, auto enrolment pension may be a great first step. Grab this opportunity!