By Tom Harris 6 Aug 2010 [0 Comments | 957 views]
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Pensions are in the news again, with the last few days seeing a spate of reports and surveys. Mercer has released findings on how changes in assumptions relating to our expected longevity have forced further upgrades in pension scheme liabilities. LCP has had good news on the decline in FTSE company pension deficits, and life insurer Alico has got some findings on how our perception of how much money we require to fund our retirement lags woefully behind reality. Peek beneath the surface, and the tale of our pension crisis in the making maybe doesn’t look quite so bad.
This is the drift of Mercer’s latest take. FTSE 100 companies have increased their UK longevity assumptions by about five months for current pensioners and by about seven months for future retirees. On average, scheme members aged 45 are now expected to live nearly two years longer from retirement than a member currently aged 65, compared with December 2008. It’s the fourth year in succession that companies have increased their longevity assumptions.
Mercer said: “The data also showed continuing disagreement on inflation assumptions, with company assumptions varying from 3.1 per cent pa to 3.9 per cent pa. Similarly, the expected long term rate of return on equities varies from 6.9 per cent pa to 9.2 per cent pa.”
But despite the rise in liabilities arising from our increased longevity, the pension deficit for the FTSE 100 has shrunk. Okay, the falling deficit can partially be explained because more companies are ditching final salary pensions. But LCP has gone all bullish. It said: “FTSE 100 companies paid an unprecedented £17.5 billion into their defined benefit schemes in 2009, 50% more than the previous year.”
The influx helped drive the aggregate FTSE 100 pension deficit down to £51 billion, nearly half the record £96 billion of a year earlier. Increases in asset values following strong investment returns were another factor behind the lower deficit.
Eight companies – BAE Systems, British Airways, Invensys, Lloyds Banking Group, Morrisons, Rolls-Royce, Serco and Wolseley – all paid more to their pension schemes than they did to their shareholders in dividends. And Royal Dutch Shell forked out £3.3 billion on reducing its deficit, up more than £2.5 billion on contributions paid over the previous year. It was joined in the billion-pound pension reduction camp by Lloyds Banking Group, Royal Bank of Scotland and Unilever.
And finally, from bad, to good, and then back to bad news.
According to Alico, nearly half of UK adults believe that they need an income of between £20,001 and £40,000 per year to be able to retire in comfort. However, in order for a 65-year old woman to retire on £33,070 per year, she would need to have accrued a pension pot of £537,900. This is more than double the average £256,750 that respondents think they will need to retire on.
Apparently the average Brit expects to have amassed a fund of just £168,060 at the point of retirement – which would give a female who retires at 65 years of age an annual payout of just £10,908. This is less than one-third of the amount which the average Brit believes they need in order to be able to enjoy a comfortable retirement.
Alico beat the education drum, with Jon Sadler, Head of Retirement Solutions at Alico Wealth Management saying: “Despite all the media attention in recent years, people in the UK still need to be better educated about the importance of making provision for the future. Getting into the habit of putting a regular amount of money into a personal pension and making sure their pensions keep working hard will go a long way towards ensuring a more comfortable retirement for people in the UK – even if the payments start off small and build up over time.”
Okay, so that’s bad, good, and bad. But is it really? Why do we have a pension crisis in the making – because we are living longer? Well, excuse us for being pedantic, but isn’t that good news?
And naturally, if we live longer we need either to save more for our pension, or to retire at an older age. To try and avoid either of these things really does smack of having one’s cake and eating it.
But on the question of us all saving more, there is a danger that this rise in saving will lead to a fall in aggregate demand, meaning less growth, less tax receipts for the government, maybe rising unemployment, and perhaps deflation that could to an extent undo all the good work we have done by saving. This is precisely what has being going on in Japan.
The ultimate solution to the pension crisis lies in raising the rate of productivity per unit of labour. The more the working population can produce, the more surplus there will be for the retired population. The best way that UK PLC can prepare for the retirement of the baby boomers is through innovation.
And that brings us to demographics. The Western world sits on a demographic time bomb, but the UK doesn’t. If we sit on anything, it’s more like a demographic time bleeper.
The UK’s population is due to rise from 66 to 77 million between now and 2050, while Europe’s population as a whole is expected to contract. Our elderly support ratio, that’s working people to retired, is set to fall from 4 to 3. But the ratio across Europe is expected to fall from 4 to 2, and the ratio in Japan is expected to fall to 1.
It seems that, actually, we are pretty lucky. We are set to live longer, enjoy healthier lives, and in the UK the demographic shock will be quite mild.
