Private sector pensions crisis as membership halves
ONS warns of ‘retirement gap’ in UK as number of people in private pensions falls by 17% in just one year
guardian.co.uk, Tuesday 17 July 2012 16.00 BST
Only three million people in the private sector are saving into a pension, 600,000 less than in 2008, as Office for National Statistic figures reveal a widening gulf with the public sector.
The ONS said the number of workers in the public sector with a pension increased from 4.1 million in 1995 to 5.4 million in 2009 before slipping back to 5.3 million in 2010. But since 1995, the number of private sector workers in pension schemes has fallen from 6.2 million to 3.6 million in 2009, followed by a further 17% fall to 3 million in 2010. The number is now just a fraction of the 8.1 million private sector workers who were members of a pension scheme in 1967.
The crisis in private sector pensions has been made worse by the collapse in final-salary schemes, which offer much higher retirement incomes than new-style “defined contribution” (DC) schemes. Fewer than one in 10 people working in the private sector now has a final salary pension, compared to more than a third in 1997. Most schemes in the public sector are final salary-style pensions.
Workers with DC schemes now see just 6.2% of their pay put into a pension pot by their employer, said the ONS, compared to the 15.8% company contribution paid into final-salary schemes.
Combined with improved longevity and falling annuity rates, the lower contribution rates suggest that the next generation will enter retirement with a much lower standard of living than the current generation.
Even the self-employed – typically the biggest contributors to private personal pensions – have turned their backs on saving. The ONS said that as recently as 1998, 64% of self-employed men working full time in Britain belonged to a private pension scheme, but that figure nearly halved by 2010, to just 37%.
On some measures, workers in the UK now have among the worst outlook for retirement in the developed world, with the ONS warning of a looming “pensions gap”. On average, combining the state pension with money accumulated in private pensions, British workers are on target for an income of just 32% of their former salary when they reach retirement, compared with more than 90% in some other developed countries.
“With a lower total pension provision than many other OECD countries, a pensions gap has been created,” said the ONS. “The gross replacement rates of mandatory pension schemes for average earners include highs of over 95% in Iceland and Greece but 32% in the UK.”
The outlook may be even worse than the figures currently suggest, because the ONS has not adjusted for the controversial changes made in the Pensions Act 2011, where any future rises in the state pension will be indexed to CPI, rather than the higher measure of inflation, RPI.
Final salary schemes are now the preserve of an elite group of highly-paid private sector workers, the ONS figures suggest. It found that while 75% of males earning £600 a week or more are in an occupational pension scheme, just 14% of men in the private sector earning less than £300 a week have a pension.
The figures come as the government prepares to launch the controversial “auto enrolment” scheme in October. Under the scheme, both the worker and the employer will be expected to pay 1% of salary into a private pension pot, rising to a combined total of 8% by 2018.
Jamie Jenkins, head of workplace strategy at Standard Life, said: “Today’s ONS figures on pension scheme membership clearly show that the number of people saving for their retirement is falling. It’s not just the number of people in workplace schemes that is decreasing – those making private provision has fallen too. This is why the introduction of auto-enrolment into company pension schemes is such an important opportunity to change the tide for consumers.”
But critics say that auto-enrolment will fail to provide low-paid workers with much of a retirement income and, as it is based on stock market performance, has no guarantee on returns.