The Pensions Policy Institute has put a date on the death of final salary pensions in the private sector. Apparently by 2020 they will have all-but disappeared, as businesses close schemes to new entrants, and freeze schemes for current staff.
It could be a disaster, precipitating a massive crisis for retirees. However, one expert says there's a small chance of salvation.
Closing schemesThe PPI claims come on the back of a decade of bad news for final salary pensions, which have been under pressure from all sides. First investment performance didn't do as well as expected, so companies found themselves having to put more cash into the schemes to keep them propped up. Then the rules about valuations became tougher, which made the holes in pensions even larger, and cost companies even more. At the same time, pensioners were living longer, and they were having to pay out far more per pensioner.
Companies responded by closing their schemes as fast as they could get away with - first closing them to new employees and then closing them to new accruals for existing members.
Disaster?The PPI says of these schemes: "In a defined contribution scheme, it is the scheme member who bears all of these risks. If investment returns are poor, the member retires with a smaller pension pot and gets a lower pension income, if life expectancy increases faster than anticipated they will receive a worse annuity rate and receive a smaller annual pension."
This could also spell disaster because traditionally these are far less generous and therefore tend to mean far more people living on far less in retirement. Tom McPhail, head of pensions research at Hargreaves Lansdown agrees that things look bad, pointing out that: "We have lost the paternalism of the state and the employer and we haven't yet pulled off the difficult trick of getting individuals to take on the responsibility themselves."
As a result, he told AOL: "We are seeing people go into pensions too late, the amount they are paying in is inadequate, their engagement with the investments within their pensions is patchy, and the decisions they make at retirement about securing an income are poor."
The hopeHowever, he also believes that things may not be as bad as they seem, arguing that all the pieces are in place to solve these problems. The key one is auto-enrolment. That kicks in from this October, and will gradually mean that almost everyone becomes a member of a pension scheme, to which their employer and they are forced to contribute. In addition there are mass market pension schemes and new ways of managing your money which will help people make good decisions thought their savings period.
McPhail says: "Confidence in the system is at an all-time low, but this may prove to be the nadir, and from here we will start to see improvements. Within just a few years of auto-enrolment I believe we will see people start to take responsibility for their own retirement and by 2020 the world will have changed a great deal."
But what do you think? Are we set for a pensions crisis or on the verge of a solution? Let us know in the comments.