Pension 'black hole' could leave millions facing misery

Retirement plans are looking less rosy for anyone relying on the state scheme

The UK's state pension provision is the worst of all the G7 countries, leaving millions of British workers facing penury in retirement.

According to a report published today, almost two-thirds of people are planning to rely on the state pension when they retire even though it's worth just 31 per cent of the nation's average earnings.

That's less than half that of Italians, who retire with a state pension worth 68 per cent of average earnings. The French, meanwhile, get 51 per cent, Canadians 44 per cent, Americans 41 per cent and Germans 40 per cent.

Only Japan's state pension is close to paying such paltry sums as the UK scheme and even there workers are better off, receiving a pension of 34 per cent of average earnings.

"There are severe shortcomings in the UK's state pension," says pensions expert Tom McPhail of Hargreaves Lansdown. "That's not a necessarily a bad thing as long as the state scheme is supported by a robust private sector. But it's not, and that means that rather than relying on the state pension, everyone needs to ask themselves whether they are doing enough to save for their retirement."

The problem, according to AXA, the insurance companies group that conducted the research, is that more and more workers are moving away from occupational pension schemes without replacing them with adequate savings for their retirement.

As a result, there has been an alarming fall in the number of active members in occupational schemes. There were 10.7 million active members in 1991, but that had fallen to 8.8 million by 2007. It means that around two-thirds of the current working population have no form of occupational pension schemes.

Steve Folkard, head of savings and pensions policy at AXA says: "There has to be a concerted, co-ordinated effort to make sure that people are adequately provided for, or we will inevitably be faced with a pensions dark age."

The government has recognised the problem and plans to introduce new rules that will enrol people into their company's pension scheme unless they choose to opt out. That's an effective reversal of the current position where, even if a firm has a pension scheme, it only invites employees to join. In other words, they have to opt in.

The new auto-enrolment rules are set to come in from 2012, when new simple retirement savings schemes known as Personal Accounts are set to be introduced.

But Folkard isn't convinced that the new schemes will prove to be a great success. "While many believe Personal Accounts may improve the picture, there remains a large amount of uncertainty around their implementation and potential impact," he says.

"The Pensions Policy Institute estimates that the introduction of auto-enrolment into workplace pensions could lead to an additional 10 million savers in schemes. However, AXA's research shows that just 19 per cent of people are likely to take part in the automatically-enrolled scheme."

He warns that, by 2020, there could be a rise of just 800,000 members in occupational pension schemes, far short of the 10 million estimate. "The lack of political consensus coupled with the ongoing economic situation may yet require a further rethink of future pension reforms," Folkard says.

"The erosion of the once sound company pensions infrastructure in the UK, which supported the retirement needs of the working population over much of the 20th century, presents a future government with a massive challenge. Pensioner poverty is set to grow dramatically over the coming years and current reform measures will take years to implement."

Part of the existing problem is that, at the present, the means-tested related state pension scheme deters people from saving for themselves as doing so can cut their retirement entitlement. In short, people who do nothing can end up with more state benefits than people who do something and end up with nothing from the state.

"We need some pretty bold political vision," says Tom McPhail. "There needs to be a great deal more reform in the pensions infrastructure to encourage people to save for their retirement. In the meantime it's essential people build up the personal discipline of saving a regular amount."

Axa's Folkard agrees. "Individuals must take more personal responsibility in saving for an adequate level of retirement provision. We risk heading past the point of no return for many people in this country who may be left living on the very minimum in retirement."