Pension pots will diminish for younger workers, according to analysis by Barnett Waddingham
David Woods, January 24, 2012
Figures produced by the actuarial firm Barnett Waddingham point to a big disparity between what a young person can expect to receive in the future by way of a private sector pension arrangement compared with someone of the older generation retiring now.
A member of a defined benefit (DB) scheme who joined at age 20 and is retiring now at age 60 would expect to receive an annual pension of approximately £21,070.
This is based on a national average salary of £31,600.
A member of a defined contribution (DC) scheme over the same period on a notional auto-enrolment minimum contribution basis would have produced a DC pension of £13,330pa.
The projected DC pension for a 20 year old starting a pension plan now and paying into it for the next 40 years is very different. This results in a pension expressed in today's money of only £6,440pa.
And even if the member were to pay contributions for an extra five years and not draw pension until age 65, the projected pension (in today's money) would only increase to £9,300 pa.
Malcolm McLean, consultant at Barnett Waddingham said: "These figures show the stark reality of the pension divide between past and future generations.
"As things stand at the moment producing the level of pension income enjoyed by substantial numbers of former workers in the private sector previously will clearly be well beyond the reach of many in the years ahead.
"But that is only the half of it. I don't think anyone should be in doubt about the extent of the pensions crisis we are facing with millions of people currently making no financial provision at all for their old age and seemingly having neither the ability or the inclination to do so.
"With increasing longevity and the ratio of workers to pensioners continuing to fall this will inevitably create massive social and economic problems for the future - and this will start to creep up on us sooner than you might think, perhaps as early as the latter part of this decade and probably escalating quite rapidly after that.
"I have to say I find the level of complacency about all this in some quarters quite breathtaking.
"The plans for auto-enrolment due to start in October of this year seem to have been a long time in the making and even now may be too little too late for many people. The take-on is being phased in over a fairly lengthy timescale which is now to be extended even further for employees in small companies with the prospect of the full implementation not being achieved until 2018 or even later.
"With employers in the private sector now either unable or unwilling to support the high quality occupational pension schemes that existed in the past, everything seems to depend on a successful outcome for auto-enrolment which in turn depends rather unpredictably on the willingness of individuals either through apathy or design to remain enrolled and not opt themselves out. There are no equivalent plans as far as I am aware for the self-employed or those otherwise outside of employment.
"It remains my view that the Government should develop a Plan B for implementation at the earliest possible stage should auto-enrolment fail to deliver the desired results. And in the meantime there should be no resting on laurels. To the man and woman in the street pensions are one of the great mysteries of our age. There is much that can be done to de-regulate and simplify the system with better communication and elimination of the jargon that so confuses and misleads members and would-be members of pension schemes.
"What has happened to our once great and much valued private pension system is a sorry tale but we owe it to succeeding generations to do what we can to at least partially restore the situation before it is too late."