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Last Updated: Wednesday, 23 November 2005, 15:36 GMT
How the pensions crisis evolved
By Julian Knight
BBC News personal finance reporter

Public confidence in pension saving has been eroded
The UK pensions system was once described, by former Labour minister Frank Field, as the envy of the world.

It is easy to see why Mr Field had such a high opinion of the UK pensions system.

At the time, the UK enjoyed a unique balance of pension provision.

The basic state pension was topped up with extensive and lucrative workplace and private pensions.

The UK had it so good that pension bigwigs were wont to lecture their European counterparts on how they should be managing their affairs.

Now, though, times have definitely changed.

The financial health of workplace pensions has been eroded by higher taxes and stock market underperformance. Personal pensions have fallen out of favour because of poor performance and mis-selling scandals.

All the while the state pension, which increases each year in line with prices rather than average salaries, has become less and less significant.

By 2050, the state pension is predicted to be worth less than 10% of average salaries.

The spectacle of decent people losing their pensions has shaken confidence to its very core
Malcolm McLean, Pensions Advisory Service

The result: the UK pension system has moved from world leader to laggard in a few short years.

Crisis of confidence

But when and how did the rot set in?

"The UK's pension problems result in large part from a crisis of confidence," Malcolm McLean, chief executive of the Pensions Advisory Service (Opas), told BBC News.

Mr McLean points to the Maxwell affair - where Mirror Group workers had their pensions stolen - and the mis-selling of personal pensions in the late 1980s, as key events causing Britons to turn their backs on pensions.

More recently, confidence has been further undermined by the collapse of a large number of company final salary pension schemes.

Can anyone tell me what kind of jobs 67 to 70 year olds are going to be doing?
Mike, West Sussex

Final salary schemes, which pay workers a pension depending on length of service and salary, have long been considered the gold standard of pension provision.

But their security looks fragile now that an estimated 85,000 workers have lost these pensions.

"The implications of this can't be overstated," Mr McLean said.

"The spectacle of decent people losing their pensions has shaken confidence to its very core."

Icy blast

Even those who have not lost their retirement savings are feeling the pinch of the pensions crisis.

Up to two thirds of all final salary pensions schemes are now closed to new members.

This means that longstanding members still enjoy final salary rights while new joiners are often shunted into probably inferior pension schemes with no guarantees.

A hand chained to a desk
People may have to work for longer

This has helped create what experts call multi-tier pension provision.

"At the top of the pile we have private sector and public sector workers still in a final salary scheme," Dr Ros Altmann, a former government pensions adviser turned campaigner, told BBC News.

"Then we have workers shunted into inferior pensions and at the bottom people with no pension coverage at all."

The government's imposition of a tax on share dividends - costing schemes an estimated 30bn since 1997 - has been blamed for the widespread closure of schemes.

But the effects on pension schemes of stock market falls between 2000 and 2003 should not be underestimated.

"Against such a backdrop, even the most paternalistic employer realised it was too expensive to carry on offering generous pensions," Mr McLean said.


The government and employers have become increasingly aware of what has become known as the "demographic time bomb".

Put simply, in future there will be fewer people of working age to pay the pensions of the retired.

This impacts all types of pension saving and according to the government's Pensions Commission means people will either have to work longer, save more or pay higher taxes.

The commission, headed by Lord Turner, will outline concrete proposals for how this demographic challenge can be met.

Viral infection

It can hardly be said that successive governments have not had a crack at curing the UK's pension ills.

The problem politicians have with pensions is that there is no political capital in making tough decisions today
Dr Ros Altmann, pensions expert

There have been no fewer than 13 government-sponsored reports and pieces of legislation relating to pensions since 1988.

And since 1997, there have been 15 politicians in charge of UK pensions.

Most recently the government has acted to shore up confidence by introducing the pension protection fund (PPF).

The PPF provides a safety net for final salary schemes, ensuring workplace pension promises are kept.

At the same time the labyrinthine pension rules are set to be simplified in April 2006.

But every time a remedy is brought to bear, it seems, the UK's pensions problems mutate - inflicting ever more pain.

"The problem politicians have with pensions is that there is no political capital in making tough decisions today. Politicians have a time frame of four and five years while proper pension planning is all about 30 or 40 years," Ms Altmann said.

"The most recent example of short term thinking was when the government backed down over plans to increase the public sector pension age from 60 to 65."

Recently, Christine Farnish, the highly influential head of the National Association of Pension Funds, suggested that a permanent independent body was needed to oversee long-term pension strategy.

Facts and figures outlining the depth of the UK pensions crisis

Inevitably, though, politicians from all parties will continue to want their say on pensions.

International comparison

But is it really all doom and gloom? Can the halcyon days return, when the UK could again dish out pension lectures?

Surprisingly, the answer may be yes. The demographic outlook is worse in many other countries.

By 2050 the percentage of the UK population aged over 60 is set to rise from 21.2% to 29.4%.

But in France, Italy and Germany the over-60s will make up 33%, 41%, and 35% of the populations respectively.

And it's not just in "old Europe" that the demographic timebomb is ticking.

In China, Indonesia and South Korea - all rapidly emerging economies - the percentage of over 60s is set to rise above 30%.

Clouds clear

In addition, some experts suggest the dire warnings over future pensioner poverty are overstated. The doomsayers, they believe, are not taking into account money invested in property or inherited wealth.

Adair Turner
The Pensions Commission under Lord Turner reports on 30 November

Gemma Tatlow, an economics researcher at the Institute for Fiscal Studies (IFS), told BBC News that when these forms of wealth were thrown into the mix the pension stormclouds clear a little.

"Pensions are important but they are not the only way to provide for retirement," said Ms Tatlow.

"We have calculated that nearly half the wealth available in old age is in the form of housing and inheritance.

"People have not used this wealth because of generous pensions but future generations might have to use property and inheritance to fund their retirement."

Under the IFS analysis, the proportion of people in their 50s heading for poverty falls to less than one in 10.

But difficult choices will still have to be made.

"Looking at the position of people in their 20s and 30s, ultimately they are going to have to work longer and save a little more than at present," Ms Tatlow said.

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