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The Actuary The magazine of the Institute & Faculty of Actuaries

Presidential afterword

The Pensions Commission, chaired by Adair Turner, now Lord Turner of Ecchinswell, issued its second report on 30 November 2005. The government called for a national debate on pensions reform and promised a white paper in spring 2006. In government-speak, ‘spring’ continues until the day before midsummer’s day, so don’t hold your breath.
Most of the media ‘noise’ so far has been about the proposed National Pension Savings Scheme (NPSS), with the government challenging the trade bodies, the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF), to produce better alternatives. From the profession’s point of view, it is important that we contribute to this ‘national debate’. Given our limited resources, and the limited time available, it seemed sensible to concentrate on a couple of areas where we had particular expertise and could make a distinctive contribution.

Life expectancy and increasing SPA
The Pensions Commission rightly emphasised the need to respond to increasing life expectancy by raising state pension age (SPA). It proposed an increase from 65 to 68 in three stages between 2030 and 2050. It also went on to point out that there is a trade-off which governments, and the electorate, can make between raising SPA and increasing taxation.
The basis of the proposal in the Pensions Commission report is that the proportions of adult life (measured from age 18 to the life expectancy of a 65-year-old) spent in work and in retirement should remain constant, at about 70% and 30% respectively. In broad terms, this means if life expectancy improves by three years, SPA goes up by two years and the average person has one extra year drawing their state pension. We point out that this illustrates that the ‘work until you drop’ headlines are wide of the mark.
We also observed that, although the constant 70:30 ratio can be viewed as stabilising costs on a pay-as-you-go (PAYG) basis, the steady increase in the period spent drawing a state pension will push up the absolute costs.
Our key message is about uncertainty. Quite simply, no one knows what the life expectancy in 2050 will be for the generation now in their early 20s, when they reach their late 60s. Given this great uncertainty, the system being designed now needs to be flexible and adaptable, so that SPA can be adjusted to meet changing circumstances. We come out in strong support of the call for a permanent pensions commission, charged with regularly reviewing life expectancy forecasts and reporting to Parliament on the trade-off between changes to SPA and the impact on taxation.

I am not sure who takes the credit for inventing this new word. ‘Decumulation’ in pension terms is the opposite of accumulation and refers to the conversion of pension assets accumulated during working life into a pension income to be spent in retired life. We expressed our disappointment that the Pensions Commission had largely ignored the issues surrounding decumulation in its report.
We were able to draw on the output from the profession’s Competition for Innovation, organised late last year by the Finance, Investment & Risk Management Board. For this competition we had identified three different stages of retirement:
– ‘Part-time retirement’, when people may have some part-time work, supplemented by drawing down some of their savings.
– ‘Full-time retirement’, when the pensioner is wholly dependant on their savings and pension.
– The later stages of life, when failing health will often require expensive long-term care.
Our response to the Pensions Commission argues that there should be a move away from ‘one size fits all’ annuitisation.
Instead, people should be empowered to take control of their finances in retirement. For this to succeed, people will need greater help and education, which will be a major challenge. They will also need a wider range of products, including more flexible retirement products with a ‘volume knob’, so that they can adjust their income to meet their changing circumstances.
Our key message is to recognise that many pensioners could spend their money faster. It is one of today’s financial tragedies that middle-income people, having scrimped and saved while working to build up assets for retirement, then do not enjoy them but end up having assets which are taxed at 40% on their death. If retirement could be positioned in a much more positive way, as a time for people to relax and enjoy their accumulated savings, then this would create a virtuous circle. Government, regulators, and the savings industry have missed a trick by presenting the savings process as a duty, rather than a pleasure. So, the actuarial profession can shed its media image as ‘doom and gloom merchants’ and preach a positive message take control of your finances and enjoy your retirement to the full.
See the article on p36, ‘Competitive retirement strategies’, which reports on the profession’s competition for the best strategy to improve income from a defined contribution arrangement.