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Last Updated: Friday, 26 May 2006, 09:08 GMT 10:08 UK
Pensions: winners and losers
By David Cule
Principal, Punter Southall actuarial firm

David Cule, pensions expert
Now that the pensions White Paper has been published, an expert looks at who will win and who will lose as a result - and at what challenges still remain for UK pensions.

Over the last few years, it has become rare to find the word "pensions" in the news without the word "crisis" next to it.

Both current and future generations of pensioners have been looking to the White Paper to provide a solution to that crisis.

But is the white paper a white knight charging in to save UK pensions - or a white flag signalling the Government's surrender to pensions chaos?

Crisis? What crisis?

What sort of pensions crisis are we facing?

Well, there are actually not one, but two.

The first is the crisis that waits for us in future. Lord Turner's Pensions Commission analysed this in its first report in 2004.

Employees joining the Personal Accounts scheme will have lower take-home pay, and future pay rises may be restricted to pay for the employer's share of the contributions

People are living longer and having fewer children, with the result that by 2050 there will be about 2 people of working age for every pensioner, against about 4 to 1 at present.

Clearly, something has to change if pensioners are not to become poorer.

The white paper is a big step in the right direction to dealing with this crisis.

But the second crisis is the crisis being faced now by company pension schemes - in particular those providing defined benefits, known as final salary schemes.

Over recent years, it has become much more onerous for companies to run pension schemes, with many final salary schemes closing the doors to new members or even shutting down altogether.

The government proposes to consult on measures to take a little pressure off final salary schemes, although we will have to wait to see what these amount to in practice.


What will the proposals mean for the average person on the street?

  • People currently under age 47 will have to wait longer to draw their state pension benefits - the state pension age is due to rise to 66 in 2024 and to 68 by 2044. However, as people should on average be living longer, the proportion of their life they spend in retirement should stay about the same
  • People will benefit from a higher basic state pension: this should rise from 2012 in line with earnings "subject to affordability"
  • Employees who don't already benefit from a good occupational pension scheme will be automatically enrolled into a new scheme of Personal Accounts from 2012. They will contribute 4% of their earnings between 5,000 and 33,000 while their employer pays in 3%, unless the employee chooses to opt out

Employees joining the Personal Accounts scheme will have lower take-home pay and future pay rises may be restricted to pay for the employer's share of the contributions.

Overall, however, the white paper should improve the pension of the average man on the street when he comes to retirement - and it should be even better news for the average woman on the street.

That is because the white paper proposes to change the way the state pension is calculated, to take account of the fact that women tend to have more interrupted working lives than men.


But whilst this all sounds very encouraging, it is inevitable that some people will do less well than others out of the proposals:

  • The self-employed will not get the full benefit of a Personal Account as there is no employer to contribute on their behalf
  • People who currently opt out of the state second pension through money purchase pension schemes will find themselves put back into a less valuable state second pension
  • Personal Accounts may be a burden on small businesses for whom the 3% contribution represents a significant additional cost. The government will be consulting on measures to soften the blow, but we don't yet know the extent of them
  • Other potential losers are those individuals who still benefit from open defined-benefit schemes. The average company contribution to a defined benefit scheme was 16.5% in 2005, so that could be an incentive for an employer to switch to the 3% contribution in a Personal Account.


It is essential that the government creates a pension system that is simple to explain

Whilst the proposals in the white paper are a step in the right direction, a number of problems remain.

One is means-testing. The new proposals should lead to a reduction in means-testing, since the higher state pension plus the benefits from Personal Accounts should lift more people above the threshold.

But it is not compulsory to have a Personal Account - and so there will still be people who choose to spend their money now, knowing that the state will provide them with a minimum in retirement.

Another is to ensure that there is a smooth and straightforward transition.

It is essential that the government creates a pension system that is simple to explain.

Otherwise, there is a real risk that, whatever the merits of the white paper proposals, individuals will opt out of a system that they cannot understand.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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