The Macro-economics of Pensions
31 Oct 2003
PMI Trustee Group News: Update October 2003
Anyone with an interest in the big picture of pension provision in the United Kingdom should read the text of a recent lecture to the actuarial profession given by Adair Turner, entitled The Macro-economics of Pensions.
Adair Turner, a former Director- General of the CBI, is chairman of the independent Pension Commission, set up to advise the Government on policies for private pension saving, taking into account the state system.
The central premise is that there is a “pensions gap”. Firstly, while part of the population enjoys good private pension provision, there are many groups, typically women, self-employed and employees with modest incomes who have inadequate accrued pension assets.
Secondly, there is a wider proposition that, as a result of demographic change, particularly with people living longer and falling fertility, there is an overall shortfall in accrued pension assets, and that somehow the population must save more for retirement.
With state provision taking about 5.5% of the national economy (or Gross Domestic Product) and likely to remain around this level, it is estimated that private provision will have to double, roughly from 4.3% to 8.5% of GDP, if the next generation of pensioners are, overall, to be as well-off as the current generation, as a result of the changing demographics.
The question is: Is such an increase achievable and what would be the consequences? Any increase in saved assets or consumption by one section of the population requires a shift of resources or consumption away from another.
In fact, any system of pension provision, whether Pay As You Go, as is the state system which is funded by taxation, or private provision, funded by savings, requires a transfer of consumption from the economically active, that is the generation in work, to the previous generation, the retired.
Mr Turner concludes that one of three things will therefore happen, or some combination of all of them. Future pensioners will be poorer than today. Future workers must be induced to give up more of their consumption in taxes or savings. Or, retirement ages must rise.
He thinks that only a modest increase in the proportion of GDP, not 4%, saved by the private sector will be achievable and most of the strain will have to be taken by retirement ages rising, unless pensioners are going to be poorer.
In terms of the type of pension provision for later retirement, defined contribution arrangements will be attractive to employers, because it is plain that defined benefit provision is expensive and discourages employers from retaining older workers. However, it will mean more and more investment risk put on individuals, acceptable perhaps for the better off, but not so acceptable for those on modest pensions. What safety net should there be to protect the weakest?
This is a relevant debate. Most of the recent proposals of the Government are about improving the security of existing defined benefit pension schemes, many of which are in deficit, and are a response to today’s problems. Government is not yet ready to face the really difficult political decisions about future pension provision. The final report of the Pension Commission, due in two years time, could be a milestone.
Adair Turner’s paper is to be found on the actuarial profession’s website
http://www.actuaries.org.uk/
Robert Thomas
Law Debenture
Pension Trusteeship
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