Wednesday, December 6, 2017

The UK's Pension Disaster?

 Katie Morley of the Telegraph reports, UK state pensions ranked the worst in the developed world:
The British state pension is now worst in the developed world as it has fallen below Mexico and Chile, data shows.

An average worker entering the UK workforce today can expect to receive less than a third (29 per cent) of their final working salary as a basic pension income after tax, according to a report published every two years by the Organisation for Economic Co-operation and Development.

This is a reduction of around 40 per cent of what their equivalents who entered the labour market back in 2002 could have expected to receive as a percentage (47.6 per cent) of their final salary. Since the study began the UK has consistently ranked low on the list, ranking below Chile and Mexico last year, however it has never come last before.

The reason for the UK falling to the bottom of the league table is down to the earnings-related element of the state pension being removed along with the introduction of the new flat-rate pension, the OECD said.

It means UK retirees who fail to make their own pension provision face a steep income drop when they retire compared with other OECD countries.

By contrast the average worker across the OECD can expect 63 per cent of their salary as a state funded pension.

TUC general secretary Frances O’Grady said: “Working people in Britain face the biggest retirement cliff edge of any developed nation. We are letting down today’s workers if we can’t provide them with a decent retirement income.”

The OECD said that like other countries, the UK is “ageing quickly” and the number of people aged 65 and over for every 100 people of working age will rise from about 30 today to 48 in 2050.

It said: “Already today, poverty among older people is high in the United Kingdom: among those aged 75 and over 18.5 per cent have incomes below the poverty line, most of them women. The main reason is the low level of the state pension.”

The new simplified state pension should improve matters, but there is a long transition period, the report said. While those who are able to save, buy their own home and put money in private pensions may have relatively good incomes, retirees without these types of revenue “are left with few resources,” it said.

The report also suggested that the pension freedoms and the rigidity of the state pension, which cannot be accessed until people reach a certain age, could increase inequality in the UK. It said recent changes enabling older people to withdraw chunks of cash from their retirement pots could lead to further inequality “as not all will be able to finance retiring earlier”.

The OECD also warned that some people using the pension freedoms may be inclined to spend their lump sums early or underestimate their life expectancy, leaving them with limited resources at a very old age.

In July, it was announced that the the state pension age in the UK will rise from 67 to 68 between 2037 and 2039, seven years earlier than previously planned.

The OECD promotes policies aiming to improve the economic and social wellbeing of people globally.

A DWP spokesperson said: “We have taken decisive action to address our changing population through a new, generous State Pension, retaining the Triple Lock and protecting the poorest through Pension Credit - reducing pensioner poverty close to historically low levels.

“But there’s always more to do. Thanks to automatic enrolment, around 11 million people will be newly saving or saving more into a workplace pension by 2018.”
Patrick Collinson of the Guardian also reports, OECD: UK has lowest state pension of any developed country:
Britain’s workers can look forward to the worst state pension of any major country, according to a report by the developed world’s leading economic thinktank.

The Organisation for Economic Cooperation and Development (OECD) study calculated that a typical British worker will at retirement receive a state pension and other benefits worth around 29% of what they had previously been earning. That compares with an average of 63% in other OECD countries, and more than 80% in Italy and the Netherlands.

The report said this expected “net replacement rate” will be the lowest of any OECD country.

The UK population is ageing rapidly, has relatively high levels of poverty among the over-75s, and a much bigger problem with obesity in old age, said the OECD, with 20% of British over-80s classified as obese, compared with 15% in the US and under 10% in Italy.

The TUC general secretary, Frances O’Grady, said: “Working people in Britain face the biggest retirement cliff edge of any developed nation. We are letting down today’s workers if we can’t provide them with a decent retirement income.”

However, on some measures Britain’s pension system is performing better than many other OECD countries. The OECD noted that the new single-tier pension (currently £159.55) will be worth 30% more than the old state pension (currently £122.30) but added, “there is a long transition period and current retirees will not see a difference”.

The UK also fares well on employment rates among older adults, and with the introduction of auto-enrolment in 2012, the downward trend in private workplace provision has been reversed.

While the UK has the worst “mandatory” entitlements such as the state pension, it has a much bigger private pension system.

The OECD said the UK has $2.2tn in private pension assets, equal to 95% of GDP, one of the highest levels of private saving in the world. While the US, Switzerland, the Netherlands and Denmark had figures above 100% of GDP, in France and Germany, where state pension entitlements are much higher, private pensions are worth less than 10% of GDP.

Once the UK’s private pensions are added to the state pension, the average income in retirement for UK pensioners rises to just over 60% of former career earnings, just below the OECD average.

A Department for Work and Pensions (DWP) spokesman said: “We have taken decisive action to address our changing population through a new, generous state pension, retaining the triple lock and protecting the poorest through pension credit, reducing pensioner poverty close to historically low levels.

“But there’s always more to do. Thanks to automatic enrolment, around 11 million people will be newly saving or saving more into a workplace pension by 2018.”

Caroline Abrahams, the charity director at Age UK, said the report should serve as a “wake-up call”.

She said: “Given the current situation, the state pension undoubtedly remains a vital tool in the fight against pensioner poverty, giving millions of older people a small element of financial security in an increasingly uncertain world.

“But the government must look at how auto enrolment into workplace pensions can work with the state pension to deliver a decent standard of living in retirement for everyone.”
Lastly, Brian Milligan of the BBC reports, UK pension the lowest of advanced nations, says OECD:
The UK's State Pension is the least generous of all the most advanced economies in the world, according to a new report.

A study by the Organisation of Economic Co-operation and Development (OECD) suggests full-time workers in the UK do relatively poorly.

The report found that the average pensioner can expect to receive just 29% of what they earned at work.

Only South Africa - which isn't a member of the OECD - is less generous.

However, once "voluntary" pensions - such as auto enrolment or workplace pensions - are taken into account, the UK model fares better in comparison.

Even so, the pension systems in Japan, Germany, France, Italy, the United States, Canada, the Netherlands and Ireland all pay out a higher proportion of working income.

When voluntary pensions are included, the average UK pensioner receives 62% of his or her working income. This is still lower than the OECD average of 69%.

'Cliff edge'

The TUC said the government needed to improve the way the pension system works in the UK.

"The OECD has confirmed what we have long suspected - the UK is bottom of the league for pension provision," said Frances O'Grady, the TUC's general secretary.

"Working people in Britain face the biggest retirement cliff edge of any developed nation."

Since 2010 the state pension has been protected by the so-called triple lock, meaning that pension pay-outs have risen by the highest of earnings, inflation or 2.5%.

However the 2.5% element of the triple lock is due to end in 2020.

In response to the OECD report, the government pointed out that 11 million people will be saving into a workplace pension by 2018.

It said the State Pension was now more generous than it was.

"We have taken decisive action to address our changing population through a new, generous State Pension, retaining the triple lock and protecting the poorest through Pension Credit - reducing pensioner poverty close to historically low levels," a spokesperson for the Department of Work and Pensions said.

"But there's always more to do."

Discrimination

A separate report, from the Pension Protection Fund (PPF), declares that defined benefit pension schemes in the UK are increasingly investing in bonds rather than shares.

That suggests such schemes are becoming much more conservative, and risk-averse.

Back in 2006, 61% of scheme assets were invested in equities. By 2017 that number had fallen to 29%.

By contrast the percentage of assets held in bonds has risen from 28% to 56%, making such investments less volatile, but less likely to grow in value.

Some experts are critical of this trend, which they say could discriminate against younger workers in defined contribution schemes.

"Of all investors in the UK, final salary schemes should be able to take the most patient, long-term view of asset allocation and investment risk, yet they have become increasingly short-term and conservative in their strategy," said Nathan Long, pensions expert at Hargreaves Lansdown.

"This comes at the expense of the auto-enrolment generation who desperately need higher levels of contribution directed into their modern day pensions."
The UK's pension system isn't a disaster but there are serious problems that have not been addressed properly and these articles highlight them.

First, take the time to read the OECD report, Pensions at a Glance 2017, which is available here. The full report is also available here.

There is nothing shocking in this report, at least not to me. I can sum up the UK's pension policy in five words: Let them eat cat food.

The only thing saving the UK from total embarrassment when it comes to its pension system is that it has a much bigger private pension system which helps raise the "average" income in retirement for UK pensioners to 62% of former career earnings, which is still below the OECD average of 69%.

Of course, UK seniors will bear the brunt of these meager pensions, and many of them already struggling with poverty and rising health costs will be condemned to live the rest of their living years in pension poverty, joining other seniors around the world like in Japan and South Korea.

As if things aren't bad enough, Britons were recently warned they are on course for the longest fall in living standards since records began 60 years ago after the UK’s fiscal watchdog took the ax to its outlook for economic growth.

Then there are the ongoing Brexit discussions which are proving to be disastrous for Prime Minister Theresa May. The Brexit saga is also putting pressure on the pound, sparking renewed protests by 500,000 expats with 'frozen' state pensions.

Any way you slice it, it's not a good time to be a British pensioner regardless of whether you live in or outside the UK.

I'm particularly concerned with the private defined-benefit plans that are de-risking, putting more money in fixed income instead of taking intelligent risks across public and private markets all over the world. This may make sense in the short run but it spells disaster in the long run because they won't generate enough return to meet their long-term liabilities.

[Update: A corporate pension expert told me: "The reason UK corporate pension plans have such a high allocation to fixed income is that tight funding regulations force them to match their assets and liabilities very closely, just like in the Dutch plans."]

Welcome to pensions' brave new world. What the UK needs is a total rethink of its pension system to introduce a large, well-governed national public pension fund, akin to what we have here in Canada with CPPIB managing the assets of the Canada Pension Plan.

By the way, the leader of CPPIB, Mark Machin who recently exposed CPP myths, is British and doing a great job leading this organization. I would urge the Brits to hire him away but we'd like to keep him here for a few more years.

In all seriousness, the Brits need to study the evolution of the Canadian pension model more carefully. Their pension system isn't a disaster but it's far inferior to what we have in Canada, that much I can assure you.

Below, Chancellor of the Exchequer Philip Hammond recently released a budget that left him little room for fiscal maneuver as Brexit looms. UK living standards are dropping, and its deteriorating pension system will mean that these standards will continue dropping for millions of Brits facing the dire prospect of pension poverty.

Update: All is not lost for the UK, Abby Jackson of Business Insider reports for the first time in 14 years, the best university in the world isn't in America. Oxford and Cambridge topped the list.

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