COMMENT
It's Time To Build A Better Future!

By Cliff D'Arcy
September 20, 2005

With the Pensions Commission due to issue policy recommendations at the end of November, ministers are already spinning the government's line on pensions. Senior government officials are dropping hints that all UK workers will have to work for longer before claiming their State pension.

Speaking in Scotland earlier this week, the chancellor, Gordon Brown, said we must have a 'national debate' about lifting the normal retirement age for both men and women. In addition, the Work and Pensions secretary, David Blunkett, said on Sunday that this option needs to be weighed up. He also mentioned moves afoot in the US to increase the American retirement age to 67.

Currently, British men qualify for their State pension at age sixty-five. The State pension age for women will be increased from sixty to sixty-five over a ten-year period beginning in 2010, to match men's pensions. In its interim report last October, the Pensions Commission warned that several approaches would be needed to tackle Britain's 'pension poverty', such as:

• an increased State pension retirement age;
• higher taxes to fund reasonable State pensions; and
• greater savings, perhaps funded by compulsory contributions from both workers and employers.

More than four in ten British workers (42%) - around twelve million people - are either saving nothing or putting aside too little towards retirement. These people cannot look to the government to provide them with a comfortable post-work life. Sadly, those that do can expect a retirement of scrimping, saving and sacrifices. Still, much of this distress could be avoided with better budgeting and a little forward planning.

Furthermore, workers are becoming increasingly alarmed at the replacement of guaranteed final-salary company pensions with inferior money-purchase schemes. Several trade unions said they would recommend strike action to prevent members in occupational pension schemes from being forced to work more years. Indeed, five hundred workers at food firm Grampian Foods in Suffolk are to stage a one-day strike this Friday, in protest at plans to replace their final-salary scheme.

Also, public-sector workers are threatening industrial action over increased pension ages. Some union leaders have even called for a national strike to force the government to back down! However, although I have sympathy for these workers, it's time to face the harsh reality. Public-sector workers can no longer rely on the government to keep its pension promises, because the money simply isn't there.

Unlike pension schemes in the private sector, public-sector pensions are largely paid for out of general taxation, rather than by returns from a pension fund. What's more, close to 700,000 public-sector workers have been recruited since 1998, taking the total to almost seven million - a quarter of all workers. Hence, government pensions are at breaking point!

In fact, estimates for the unfunded shortfall for public-sector pensions range as high as £750 billion. Let me put that figure into context: total take-home pay for all UK residents (after tax) was £794 billion in 2004. So, it would take almost every penny earned by every single person in the UK last year to fill the government's pensions 'black hole'. Wow!

Our economy cannot support massive tax increases to fill this gap without plunging into a lengthy recession, so we are forced to consider any and all alternatives. If the choice boiled down to facing reality, tightening your belt, saving more and accepting compromises on one hand, or the possible collapse of government or company pensions at some point on the other, which would you choose?

Finally, I didn't set out to pick on public-sector pensions in particular, although millions of private-sector workers have already had to bite the bullet. For example, five out of six blue-chip FTSE 100 firms no longer offer final-salary pensions schemes to new staff. Then again, directors continue to enjoy fat-cat pensions, so their nests are well and truly feathered!

My advice would be to do whatever you need to in order to tackle your retirement needs, but don't just do nothing!

More: Learn more in our Pensions centre | Six Steps To Total Financial Security!