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The Actuary The magazine of the Institute & Faculty of Actuaries

ACA chair calls for the spirit of pensions past

Speaking at the Association's 60th Anniversary Dinner at Claridge's, Mr Southall said that it was the ACA's fervent hope that the Government's promised paper in the New Year would capture some of the vision that helped build funded pensions in the 1960s and 1970s, when total active membership peaked at over 12 million employees across both the private and public sectors.

Despite the growth in employee numbers since 1951, Mr Southall noted that the number of private sector employees now in open private sector workplace schemes stands at just over three million - a return to much the same numbers as 60 years ago.

"Fundamental to the ‘pension success' of the 1960s and 1970s were financial incentives to both employers and employees and a legislative régime that was proportionate,' he said.

"Today, we really have neither and, frankly, workplace pensions are in an appalling mess as a result.

"Somehow the Government has to re-discover that kind of earlier approach, whilst retaining the best parts of the reforms thereafter. A higher level of consolidated state pension may indeed be a start if it allows greater design freedom. And above it; auto-enrolment will help too, but in challenging economic times it may also cause employers and employees to think deeply about what they can afford. Government needs to be ready to adapt its strategy to counter this.

"We understand the current PSBR constraints and the need for austerity measures, but should these further undermine the already fragile state of our over-regulated, over-protected and over-expensive pensions system there is a huge disaster waiting to happen for the under 50s. In a world where we are told we must spend to invigorate growth, we must at the same time re-discover the value of savings and it won't happen unless both mindsets and the framework are radically re-engineered.

Mr Southall said the ACA and other organisations must ensure that pension provision survives in a form most likely to deliver an adequate level of retirement income for as many of the younger generation as possible.

Elsewhere in the speech Mr Southall looked back on other developments over the last 60 years.

He noted that the ACA had grown from an organisation of just 24 members, sixty years ago, to be the largest national grouping of consulting actuaries in the world, with over 1,750 members across 75 firms.

"I am told that the then Institute of Actuaries had to be robustly persuaded of the rationale for a separate commercial wing," he said. "Whereas nowadays I hope the role of each body is far better understood and that together we can continue to maintain and enhance the standing of actuaries in an increasingly complex world.

Mr Southall also claimed that the actuarial profession had been slow to adjust to the implications of rising longevity.

"As a young actuarial student I remember reading a paper (by Clarkson I think) which suggested that low inflation could actually be rather bad for defined benefit pension schemes. At the time it seemed nothing more than a theoretical speculation but during the ‘noughties' that particular chicken really came home to roost. Clarkson was writing at a time of high inflation and extremely high interest rates and this perhaps explains why the actuarial profession might, with some justification, be accused of having taken its eye off the ball of increasing longevity.

"In 1951 a 65-year-old man expected to live to 77 and a 65-year-old woman to 80. Sixty years on, and assuming observed longevity improvements continue, the comparatives are age 88 for males (i.e. 11 years longer) and age 90 for females (i.e. 10 years longer). So that's great news for the recently retired with state pensions and most likely a final salary entitlement, but much less good for the taxpayers or corporate sponsors who have to foot the bill.

"If you were born in 1951 the then life tables predicted you would live to age 66 on average as a male (barely longer than the ACA in fact) and to age 72 as a female. Had as many women earned full state pensions back then as earn one now, one can see that their predicted 12 years' of receipts versus a man's one year might have given rise to some modest grounds for complaint!"