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Last Updated: Thursday, 4 August 2005, 06:11 GMT 07:11 UK
Young people in pensions firing line
By Julian Knight
BBC News personal finance reporter

Young people
Young people have the most to fear from the pensions crisis

Millions of young Britons are heading for an impoverished old age, far worse than their parents, experts tell BBC News.

In the 1980s and 1990s the UK was widely seen as a bad place to grow old.

The state pension was well below the EU average, while the take up of benefits was notoriously low amongst the elderly.

Horror stories of pensioners freezing to death in their own homes abounded.

In the 1980s and 1990s being elderly was the single biggest hallmark of poverty.

The idea that UK pensioners had a raw deal seeped into the collective consciousness.

In 2000 this was given further credence by the infamous 'packet of peanuts' 70p rise in the state pension, which provoked widespread discontent.

Golden age

Yet according to some experts, many of today's pensioners and those about to retire, far from struggling to make ends meet, are living through a 'golden age'.

They are immeasurably richer than their parents were, and what's more, they are likely to enjoy a far more prosperous retirement than their children and grandchildren.

As a result of a fundamental shift in UK demographics, the prospects for people retiring in twenty or thirty years time look bleak
Ruth Lea, Centre for Policy Studies

"I think that we will look back on this time as a sort of golden age," Ruth Lea, director of the think-tank the Centre for Policy Studies, told BBC News.

"Many of those in retirement or about to retire enjoy sizeable occupational pensions.

"In addition, they may have bought their homes in the 1970s or 1980s for next to nothing and be sitting on a large profit."

The figures certainly support the theory that the lot of UK pensioners has got much better in recent years.

According to official figures the number of pensioners defined as living in poverty has halved from 2.2 million to 1.1 million since 1996, coinciding with a house price boom and the introduction of the means tested pensions credit.

How is it that nearly one in five Britons live in poverty?

In fact, the drop off in pensioner poverty has been one of the major social changes of the past decade.

But experts say this 'golden age' will pass soon.

"With a low birth rate and increased longevity there will soon be too few people of working age to support Britain's pensioners," Ms Lea said.

"As a result of a fundamental shift in UK demographics, the prospects for people retiring in twenty or thirty years time look bleak."

Demographic strain

The zero sum game is that by 2050 Britain will move from having three-and-a-half workers for every pensioner to a ratio of fewer than two-and-a-half workers to every pensioner.

Under such strain, many of the foundations of UK pension provision may give way.

Ms Lea told BBC News that the way the demographics were stacked in future the government would no longer be able to afford the present generous public sector pensions.

And one senior government pensions adviser, who wished to remain anonymous, told BBC News that there was genuine concern that in the future there could be serious social conflict between pensioners and a smaller number of taxpayers who are being asked to pay more and more to support retired people.

Meanwhile, the fact that increases in the state pension are linked to prices rather than average wages means that future retirement prospects are grim for the estimated four out of ten Britons who are likely to rely on it as their sole source of retirement income.

Pension protestors from 1938
Complaints about the state pension are no new thing

According to the Government Actuary's Department if current trends continue the basic state pension will be worth less than 10% of average earnings by 2050.

Anyone relying on just the state pension in 2050 will officially be living in poverty.

Pension cuts

At the same time, UK occupational pensions - once described by former Labour social security minister Frank Field as the envy of the world - have fallen into a major crisis.

The majority of workplace final salary schemes - which offer employees a fixed percentage of their salary when they retire - have been closed to new members and replaced with money purchase schemes.

Under a money purchase scheme, workers put money into a pension fund which is used to buy an annuity - a financial product which provides an income - when they retire.

That means the workers, not the company, are taking the risk.

According to investment management firm Brewin Dolphin Wealth Management the switch from final salary to money purchase has resulted in employers cutting the amount of money they pay into their workers' pensions in half.

"The decline of workplace pensions is arguably the most serious threat of the lot," Malcolm McLean, chief executive of Pensions Advisory Service (Opas), said.

"UK state provision has always lagged behind that of countries like France and Germany but the vibrant occupational pension system made up for this, now this isn't what it was the onus is on the individual to save more."

The decline of workplace pensions is arguably the most serious threat of the lot
Malcolm McLean, Pensions Advisory Service

And just when, according to Mr McLean, UK workers need to save more to make up the shortfall in their pensions, consumers have been indulging in a credit-fuelled spending boom.

Stark conclusion

Last October, the government Pensions Commission examined what was in store for those Britons currently in their twenties, thirties and forties.

What the commission had to say should be enough to prompt sleepless nights for millions of Britons.

The stark conclusion was that millions of Britons are careering towards an impoverished old age.

And the problem could be most acute for Britain's women.

"In this scenario women continue to fare worse then men," Kate Bellamy, senior policy officer with the Fawcett Society, told BBC News.

"Many women take time off work to bring up children or care for relatives this prevents them from building up a full state or workplace pension."

"What is more, women are still paid less than men and are often stuck in low paid poor promotion prospect work," Ms Bellamy added.

The Fawcett society, as well as Age Concern, has called for the state pension to be reformed so that women who take time off work to fulfil caring responsibilities have their national insurance contributions topped up by the government.

Grim prospects

The Pensions Commission will produce its final report into the future of UK pensions in the autumn.

The commission is set to recommend that individuals need to save more, work longer and pay more taxes.

But whatever solutions are proposed the prospects for future generations of pensioners look grim.

"I think that unless something radical happens many young people are heading for a very meagre old age which could drag on for thirty or so years," Mr McLean said.

"Pensioner poverty is set to be a huge issue in the future, even those who traditionally thought they were safe from hardship will have to face up to the fact that it may affect them."

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