Fool's Eye View

[ October 17, 2000 ]

KISS Your Pension Goodbye

By Rob Davies (TMFEssex)

Carburton Street, London -- The Government knows it has a huge problem with the state pension. It is painfully aware that the current £33b bill for this scheme is too large already. But unless it does something dramatic the bill will get even larger, because the retired population is forecast to rise from the current 10m to 13.2m in 60 years' time. Yet the size of the working population will actually fall from 35.2m to 32.5m. Because the National Insurance pension scheme is a pay as you go plan, in other words today's workers fund today's pensioners, the load is going to increase unless something is done. Fewer people paying for more pensioners means higher taxes, and no one wants that. But something has been done, although quietly. Successive Governments have been cutting pensions in real terms for ages, but the population hasn't quite got the message yet. This worries HMG.

Unfortunately, state pensions are one of those taboo areas where Ministers tread very carefully: they know it is an area where they are sensitive, and no one is going to stand up in front of the electorate and say, "Hey guys, the state pension is bad, and it is going to get worse. You had better start making your own arrangements." That wouldn't go down very well with the populace. Instead it has come up with a cunning plan, fully worthy of Baldrick.

Rather than tell us the state pension will be worthless in 40 years, it is going to let us work that out for ourselves. The mechanism for this will be the combined pension statement, which will give an individual a forecast of what his pension will be. The scheme was launched yesterday at the office of Kiss FM, part of the Emap Group (LSE: EMA), which is working with the DSS on the pilot scheme.

Jeff Rooker, the Social Security Minister said: "Once people see in black and white what they will have to live on I think they will realise the importance of saving for their old age and I hope it will prompt them to review the provision they have made for their retirement."

We couldn't have put it better ourselves. The Government expects to be sending out 15m of these statements by 2005. I imagine that the reaction of most of them will be similar to that of Tim Stoller, a 23-year-old employee of Kiss FM, who was one of the guinea pigs. When he was told he could expect less than £6,000 from the state he exclaimed: "Bloody hell, I thought it would be more than that."

But that's only half the story. That figure of £6,000 sounds low now but, when Tim retires in 40 years' time, assuming inflation remains at 2%, it will only be the equivalent of £2,717. Ouch. But the Government isn't quite brave enough to tell Tim that yet.

Where Next?

• The Fool's guide to pensions is probably uppermost in your mind right now...