Archive for March 2019

Hugh Nolan

Young Savers

We all have a vague idea about how little young people engage with pensions but figures from the Office of National Statistics (ONS) suggest the problem is worse than most of us thought and is by no means limited to pension saving. Astonishingly, most people aged between 18 and 29 don’t have a single savings account and 6% of them are in debt to the tune of more than £10,000 (even before allowing for student loans).

Slightly over half of 22-29 year olds have no savings whatsoever, with this proportion up to 53% from 41% before the credit crunch. Of those who do have savings, 1 in 10 have less than £100 and 40% have less than £1,000. On the positive side, 1 in 4 have savings in excess of £6,000 and 10% have savings over £10,000. They may well be saving for a deposit on a house, as only 1 in 4 own a house (with 1 in 3 still living with their parents and the rest renting). The number of these young people owning their own home has fallen by a quarter in the last 10 years.

Debt levels look troubling for 22-29 year olds too. The good news is that only 37% of them are in debt at all, compared to 49% a decade ago. More than a quarter of those who are in debt owe more than £6,000 and 1 in 10 owes more than £14,000. Those amounts will seem huge to the 47% of them that earn less than £20,000 per annum.

The problem is naturally worse for 18 to 21 year olds. The median earnings for this group is less than £10,000 per annum and only a quarter of them earn over £15,000 a year. It’s not surprising that 75% of them still live at home with their parents and they have average debts of £2,400.

These figures really bring to life the challenge of getting young people to agree to put aside some of their earnings to save for a pension that they won’t get until 2060 or whenever. The inertia of auto-enrolment is working pretty well but we might need to bring back compulsory membership of pension schemes once the contribution rates become more realistic to provide a decent pension.

My dad once told me how much he had resented the “2 and 6” he was forced to contribute to his pension scheme. Obviously I am too young to understand what “2 and 6” means but I gather it was a reference to some money that wasn’t a huge amount but would have come in handy for a newly qualified teacher with a young family. As he got closer to retirement he realised that it was actually the best thing that had ever happened to him financially as he knew that he wouldn’t starve in retirement and, more importantly, he’d still be able to provide for his wife and children. Perhaps the time is coming when pensions should again be compulsory so that young people will get the same protection in future.

Until then, I remain keen on the idea of getting people auto-enrolled as early as possible on a very low contribution rate, with gradual increases to an adequate rate over a number of years. I also like the idea of keeping the minimum contribution rate lower than the 15% that many commentators recommend. I’d be happier with a required combined rate of 10% (split evenly between employers and their workers) where members can choose to pay AVCs if and when they can afford them, with employers matching those too. That would allow people to concentrate on buying a house or raising young children when they need to while also encouraging them to top up their pension when they have a bit more disposable income later in life.

Hugh Nolan

Fair Pensions for Women

Following International Women’s Day recently, I wondered how fair pensions are to women these days. A survey by the Society of Pension Professionals (SPP) in 2017 found that 49% of us thought that pensions were fair for women, compared to 61% who thought the same for men. Only 7% strongly disagreed that pensions were fair for women. I’m one of the 7%.

Women now have equal Normal Retirement Ages to men and can expect to live longer than men, drawing their State and any other Defined Benefit (DB) pensions for longer. The recent investigations into GMP equalisation has highlighted that it’s very hard to predict whether men or women are better off because of the remaining inequality, with the average difference being less than 1%. I can understand why people might imagine that pensions are fair between men and women. They’re still wrong though!

The main reason why pensions aren’t fair is that pay before retirement isn’t fair to start with. In 2012, the median earnings for women working full-time was £23,100 pa, some way below the equivalent figure of £28,700 pa for men. When gender pay gap reporting was introduced in 2017, 90% of women covered by the survey were working for employers who paid them less than men and in most sectors, the gap was over 10%. This might be improving slightly as early indications from the 2018 reporting suggested that 50% of companies narrowed the gap over that year, although 40% widened it.

The Office of National Statistics (ONS) says that women are paid 17.9% less per hour than men on average. It’s even worse in Germany (21%) and the US (22%). In Finland, women retiring in 2017 got pensions 27% lower than men, even though twice as many women as men got a top up national pension for those with low/no private pension savings. A DWP survey in 2016/17 found that female retirees in the UK got 40% less than men, leaving them about £7,000 pa worse off.

So it’s clearly not just the gender pay gap that is feeding through to unfair pensions for women. Women are predominantly relied on for child care with fewer than 30% of men taking more than 2 weeks parental leave, three times as many women working part time as men (5.9m compared to 2.1m in 2013) and women also typically retiring two years earlier, often because they can’t continue in their jobs rather than out of choice. On top of that, 1 in 5 women aged 45 to 59 is a carer for someone else. There are 2,700,000 working women who earn less than the £10,000 pa needed to qualify for auto-enrolment. You probably won’t be surprised to hear that more women choose caring occupations rather than those that are most lucrative.

Research from Aegon suggest that these factors combine to leave women with average pension savings of £56,000 by age 50, exactly half of the corresponding figure for men. 15% of women don’t pay into any pension scheme at all (11% for men) and only 4% of women have £300,000 or more in pension savings, compared to 15% of men. According to an Aon survey in 2018, more women than men contribute less than 5% of their pay to pensions (30% vs 40%) and more women than men worry about running out of money after retiring (64% vs 50%). 1 in 3 women admit they are unsure of their exact pension savings and only 1 in 5 men say the same, though personally I suspect that might be largely due to bravado.

As if all that wasn’t bad enough, the advantage that women have been able to draw their State Pension earlier than men has also been taken away from them. The Pensions Act 1995 set a timetable to equalise State Pension Age but the austerity agenda led to an acceleration in 2011 with 2.6 million women having their retirement plans thrown into confusion. 873 of these women are known to have self-harmed due to the stress and hardship of these reforms and 70 say they have been so badly affected that they attempted suicide.

Does that sound fair to you?

David Davison

I have highlighted the issue of legacy debt in LGPS in numerous previous bulletins, in numerous publications and at events. The whole issue is often met with some degree of disbelief. Rightly organisations question why should they be made responsible for pension liabilities which belong to someone else and why are public bodies taking the opportunity to avoid costs which are rightfully theirs.

Pension Funds and Councils are just choosing to avoid the issue and Government are just choosing to put it in the too difficult pile and ignore.

At the start of the year I issued an open letter to the Work & Pensions Committee to see if they would be prepared to raise the problem as the number of organisations I’m witnessing who are experiencing difficulties as a result of this issue has increased very significantly over the past number of months, I suspect as membership numbers in LGPS within charities continue to fall having closed schemes to new entrants.

I strongly believe that there is a potential tidal wave facing the charitable sector linked to this issue and the wider cessation debt regulation. Statistics compiled by Scottish Government back in 2014 for their schemes identified that of 422 admission bodies 223 had no guarantor. Of these 102 had fewer than 5 members and so were close to the point where they would have to manage a cessation.

Two LGPS Funds looked at the financial position in their schemes which showed that for organisations with 5 or less members the funding position moved from around £1.93m in surplus on an on-going basis to around £9.4m deficit on a cessation basis. This very much resonates with my experience and I suspect the gap has widened since 2014.

Based on these numbers I would expect that the position in England and Wales would be 8-10 times greater, so these issues could affect in the region of 2000 other charities and account for deficits approaching £80-£100m a material proportion of which relates to liabilities transitioned surreptitiously from local authority to unsuspecting charities.

A small number of LGPS have recognised the issue and made changes to deal with it but they are very much in the minority as the majority continue to stubbornly cling to the inequitable status quo.

Recent changes to the Scottish LGPS Regulations wholly ignored the issue and it was also studiously ignored by the Tier 3 review in England & Wales carried out towards the end of 2018.

The response from the Work & Pensions Committee has been positive and they have referred the matter to the Pensions Minister. I thank them for that. I will publish the letter and any response when it is received.

In the interim I would ask LGPS Funds to review this issue and to decide to ‘do the right thing’.

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