We All Need Pensions – The Prospects For Pension Provision

by Tom Ross
Principal & Actuary, Aon Consulting and Chairman of the Pension Provision Group
(From Issue 5,July 1998)

The report of the Pension Provision Group was published on 4 June and I was pleased with the general reception it got and with the extent of media attention it attracted, at least initially.

I say this without any hint of self-congratulation. Rather, I think it is absolutely vital that there is a better public understanding of the pensions issues we are facing in this country and a proper debate on the policy responses to these issues, when they eventually emerge in a Green Paper. With this objective in mind, we have tried to produce a report which is accessible and not too technical and which sets out clearly some home truths about our pensions system.  In this article, I will comment on some of our conclusions.

First, however, some background. The PPG was established in September 1997 by the Secretary of State for Social Security as part of the Government’s review of pensions policy. Its membership, which is shown in Table 1, includes not only people with wide practical experience of the occupational and personal pensions fields, but also those whose backgrounds are in the employment. social security and financial policy areas.

Table 1

The Pension Provision Group Membership

Chairman Tom Ross Aon Consulting



Ruth Hancock


Paul Johnston

Stewart Ritchie

Joanne Segars

Anne Wood

David Yeandle

Age Concern Institute of Gerontology,

King’s College London

Institute for Fiscal Studies

Scottish Equitable plc

Trades Union Congress

Storehouse plc

Engineering Employers’ Federation

Secretary Guy Fiegehen Department of Social Security
Support Joyce Carvalho

Iain Gordon

Department of Social Security

Department of Social Security

Our terms of reference were: “to determine the current levels of pension provision in the UK, and likely future trends; and to report by February 1998”  Thus, in the overall context of the Pensions Review, our job has been diagnostic, to identify the issues that policy needs to address rather than to propose policy solutions or to comment on the proposals that others have made to the Review.

We stress our independence and the diagnostic nature of our role. But we have gone further than merely identifying the issues – we have also set out to “suggest ways in which the effectiveness of alternative solutions can be judged.`  Thus we hope that our report will, for some time, be a useful reference document for commentators and professionals alike.

The Group’s key conclusions and messages

Our analysis led us to 15 key conclusions and messages, which are summarised in headline form in Table 2.  I should emphasise that our conclusions are based on a continuation of current policies.  I will comment on just some of them.

Table 2

The Group’s key conclusions

1.             The State’s role is necessary and affordable
2.             Occupational schemes have boosted some pensioner incomes
3.             SERPS is currently better than many people think, but will decline
4.             A further rise in pensioner inequality seems likely
5.             Means-tested benefit levels will inevitably continue to rise
6.             Personal pensions provide some opportunities
7.             Compulsory provision is not new
8.             Those who can save more should be encouraged to do so
9.             Pensioners do not share in economic growth
10.           The position of women is changing
11.           Self-employment can increase people’s risk of being poor in old age
12.           Everyone must be able to plan with confidence for retirement
13.           Pensions have had and always will have an element of risk for the individual
14.           More pre-funding is not a panacea
15.           Better informed and co-ordinated policy making is needed
  1. a) The State’s role is necessary and affordable

We say that the State’s role is necessary in two fundamental ways.  First, we believe, that there will always be a very significant number of people who cannot be expected to provide for their own retirement.  They need all they have to survive from day to day.  Vulnerable groups include those on low pay, as well as those with no earnings such as carers, the unemployed and those who cannot work.  For these groups, the fact must be faced., in our view, that they will have to be provided for by redistribution from better off sections of society. This is a role which only the state can perform effectively.

Secondly, the state has a necessary role in enabling those who can afford it to save properly, cost effectively and securely.  This opens the door to debate on stakeholder pensions – at whom they should be aimed and how they should be regulated; the extent of compulsion; how the regulation of occupational pensions can be made more effective and their membership expanded; and so on.

The State’s role is affordable.  Here we are saying that, on current policies whereby state pensions are increased in line with prices, we expect the cost of State pensions, in the context of even a modestly growing economy, eventually to fall, despite a large increase in the number of people over state pension age.

Table 3, taken from the report, shows the dramatic rise in the number of pensioners by the middle of the next century, against a fairly static work force.  Table 4, also from the report, shows estimates of future costs.  This shows the significant fall in likely costs on current policies and the similarly dramatic rise if, as some would advocate, state pension increases were to be linked to earnings increases from now on.

Table 3

Age distribution of GB population

Year Age 0-19 20-SPA


SPA+ Total
1997 14.5 32.4 10.4 57.3
2000 14.5 32.8 10.5 57.8
2010 14.0 33.6 11.5 59.1
2020 13.5 35.4 11.5 60.4
2030 13.4 33.9 13.8 61.1
2040 13.0 32.7 14.9 60.7
2050 12.7 32.6 14.4 59.6
2060 12.5 31.5 14.2 58.3
Indexed to 100 in 1997
1997 100 100 100 100
2000 100 101 100 101
2010 97 104 110 103
2020 93 109 110 105
2030 93 105 132 107
2040 90 101 143 106
2050 88 100 138 104
2060 87 97 136 102

Source:                   Government Actuary’s Department

Note                       SPA = state pension age

Table 4

Future contribution levels

Uprating of basic pension and contribution limit by:
Year Prices Earnings
NIC rate


% of total earnings NIC rate % of total earnings
2000 18.2 11.7 18.6 12.0
2010 17.9 11.8 20.3 13.6
2020 16.9 11.4 21.2 14.7
2030 17.4 11.7 24.2 17.2
2040 15.9 10.4 24.9 17.8
2050 14.0 8.9 24.3 17.3


Source:             Government Actuary’s Department

Notes :             (1)    Estimates assume that earnings grow faster than prices by 1.5 per cent per annum.

(2)   Contributions are those needed to meet the cost of state pensions and other National Insurance benefits.

(3)   NIC rate’ is the standard rate of contribution in respect of the earnings of employees who are not contracted out of SERPS.

(4)   Estimates for ‘% of total earnings’ express costs as a proportion of all earnings of employees and self-employed people. not just the earnings on which NICs are paid.

(b)           A further rise in pensioner inequality  seems very likely

We feel that this a major issue.  Over the past 20 years or so, the average income of the best off fifth of pensioners has grown in real terms by more than twice as much as the average income of the worst off fifth.  Today, the income of the former is about 3½  times that of the latter.

There are many reasons for this phenomenon.  Occupational pensions are an important factor.  To be decently off in retirement it is virtually essential, on current evidence, to have an occupational pension – although having an occupational pension is not a guarantee for a decent income.  SERPS is another factor. As it has matured, it has improved the incomes of a number of recently retired people.  But cutbacks in SERPS mean that its positive influence will decline in future.  Indeed, by 2050, on current policies, someone retiring on average earnings will receive less from the basic pension and SERPS combined than a similar person retiring in 1978 from the basic pension on its own.

We expect inequality to widen further in the next 25 years as good occupational pensions continue to feed through whilst SERPS declines.

(c)           Means tested benefit levels will inevitably continue to rise

We believe that, in a growing economy with rising living standards, it is unrealistic to expect that the minimum floor of income represented by means-tested benefits can be allowed to rise only in line with prices.  To do so would imply that the poorest pensioners would fall progressively further behind, with the social exclusion that this would entail. Therefore, since state pensions are planned to be increased only in line with prices, we expect those who have no other sources of income to have to rely even more on income support than they do now.

This is a matter of great concern, because many elderly people (perhaps one million) do not claim the income support to which they are entitled, calling into question the effectiveness of this approach to provision for the poorer sections of the population.

We are also concerned about the disincentive effects of the current system of means-testing, where those who do set something aside may derive no benefit since their income support would be reduced pound for pound.

(d)                 Pensioners do not share in economic growth

For most pensioners who are above the income support level, the most they are likely to receive by way of pension increases are increases in line with prices.  Thus their incomes are unlikely to keep pace with earnings, or other measures of economic growth and improving living standards.

This may not have mattered too much when pensioners were not expected to receive their incomes for long periods.  Many of today’s (and tomorrow’s) pensioners, on the other hand, can expect to be living off their pensions for a long time and they are, therefore, likely to feel keenly the decline in their relative living standards.

There are no easy answers to this problem, but I suggest two basic measures.  First, individuals should have maximum flexibility to top up their main pension arrangements and to take their benefits in a form which allows increases in excess of price increases.  Secondly, life offices should more easily be enabled to offer annuities underpinned by equity investment.  This may entail a re-think of solvency requirements but, in essence, an annuity whose amount can go down as well as up holds out the prospect of being of a higher amount in the long term.

Incidentally, these thoughts cause me to question the wisdom of so-called lifestyling in defined contribution schemes. Whilst its objectives are plausible on the surface, I fear that it results in people’s pension “pots” being taken entirely out of equities much too soon.

(e)                 Everyone must be able to plan with confidence for retirement

This is a recurring theme in our report.  We urge that the regulations surrounding funded provision should be simplified, whilst stressing the over-riding need to protect scheme members.

We suggest, like Professor Goode, that there would be merit in going back to basics, by examining the objectives of regulation and whether these objectives could be achieved in a less complicated and prescriptive way through more general and clearly expressed statements of principle.  We go so far as to suggest that, without this, it will be very difficult if not impossible to achieve a material expansion of second tier provision.

We express the view that the current tax system for pensions is appropriate and not privileged relative to other forms of saving.  We also believe that recent tax changes were damaging to confidence and highlighted the political risks in pension provision, for employers as well as for individuals.

We stress how important it is that all providers of pensions, including the State, give people clear, unambiguous and transparent information about their arrangements.  This should include pension estimates that strip out the effect of price increases and, possibly, the effect of rising living standards as well.  Some say that this would produce such low estimates that people would give up in despair.  We feel that this is a hollow argument and that people need to know as early as possible what living standards relative to other sections of society, their existing pension arrangements are likely to deliver.


Perhaps our most important conclusion is that our pensions system is not a complete disaster. Some parts of it work well – particularly occupational pensions for those who have access to them – and the costs of our state scheme are, on current policies, under control.

But there are significant problems.  In particular, those who cannot be expected to provide adequately for themselves (and that means low paid people as well as those with no earnings) have very poor prospects.  I think the Government needs to find a better way for them – a way which reduces dependency on welfare payments, which provides incentives to save and which is still affordable.  And, those who can afford it need to save more by encouragement if not compulsorily.  But this group does need a more cost effective vehicle than personal pensions, if they do not have access to a good occupational pension.  This is where I think stakeholder pensions have a meaningful role.

Thus I believe we should aim primarily for more savings rather than more savers. But I am now straying into policy areas, so it is time to stop!

© Tom Ross 1998