When Francis Fukuyama wrote the End of History and the Last Man (though most people didn’t seem to notice the last four words) a lot of people confused “history” with “events”.
Fukuyama clearly didn’t mean that there would be no more events – that would have been absurd. There have been lots of events since 1992 and some of them have been pretty historic.
What Fukuyama meant was that liberal democracy is the final form of government for all nations.
There can be no progression from liberal democracy to an alternative system. He didn’t say that democracy wouldn’t face challenges and setbacks, or that totalitarianism could not re-establish itself at a given time and in a given place, but he did believe liberal democracy will become more and more prevalent and is the most evolved system of government there can be. I guess the jury is still out on that.
I think we are seeing the beginnings of the ‘End of Retirement’. Steve Webb believes in the ‘Death of Retirement’ too, apparently. It’s not my idea, it’s not Steve’s.
I first came across the concept in a report called The Death of Retirement, from the Centre for the Study of Financial Information (CSFI) published last year. But there is plenty of room for us all on the bandwagon.
The CSFI report takes a comprehensive look at the current state of retirement provision framework in the UK, presents information from a wide range of sources and makes some bold suggestions for the way forward.
Saviour of pensions?
It reports an Office of National Statistics study as showing the median level of pension wealth – that is the present value of future pension income for defined benefit and reported value of defined contribution (DC) funds – was £82,300.
This would buy a 65-year-old a level annuity of about £4,500. There is depressing news for anyone hoping that auto-enrolment will save the day.
According to the Annual Survey of Hours and Earning quoted in the report, the median auto-enrolled employee will save around £1700 per annum. Someone on earnings of £15,000 would save £734 per annum.
This assumes that they are making the contributions at the 8% level, and we’re not there yet. And the timescale for getting to 8% has been extended to 2019.
The report goes on to ask the question “Is 8% enough?” Unsurprisingly, if the objective is to target two-thirds income inclusive of state pension the answer is “no” and the report suggests “nudging” the minimum level of contributions to 5% employee, 5% employer and 2% from tax relief.
The report suggests introducing a flat rate of tax relief of 30% to help achieve this, a kite that has been extensively flown by HM Treasury ahead of the forthcoming budget.
It also looks at barriers to saving. The SMF/Populus Savings in the Balance survey from October 2014 identified four barriers to saving as given by 75% or more of the respondents.
These were as follows:
- Affordability – 86%
- Rates of return (interest rates) – 85%
- Finding products that work for me – 79%
- Trust in Banks and Financial Institutions – 75%
I presume that the fourth point above really means a lack of trust in banks and financial institutions.
Interestingly the lowest ranked barrier to saving was “wanting to spend rather than save” which was cited by only 32% of respondents.
The report concludes that the significant levels of personal debt in the economy cannot be ignored and that a further disincentive to saving via pensions is the fact that money is tied up, inaccessible and can’t be used to deal with “rainy days” or mortgage debt until age 55 in most cases. It sounds a note of caution on flexible access, though.
While acknowledging that some element of flexible access would probably result in an increase in saving it further notes that taking advantage of that flexibility would result in smaller pots overall.
Tax relief
The report weighs in on the side of the EET approach for pensions in the wider tax relief debate, on the basis that a different level of incentive is required for long term saving than for short term “rainy day” saving. Interestingly it also advocates the capping and then phasing out of the 25% tax-free cash at retirement.
It goes onto look in some detail at a variety of issues surrounding saving for retirement and makes a valuable contribution to the debate that needs to happen around how, with improving mortality, governments, employers and pension providers can best help individuals make adequate provision.
While the report doesn’t make the point explicitly, it is clear that a lot of the issues it highlights need to be addressed by improving saver education and knowledge. The lack of confidence among UK savers in dealing with investments, as evidenced by the numbers sitting in the default investment fund of DC pension arrangements, needs addressed in particular.
A bit like Fukuyama’s End of History, the report’s title – the Death of Retirement – is open to misunderstanding. The author is not saying that retirement will cease, but that the idea of a universal retirement age followed by a lengthy period of economic inactivity is dead.
While writing this blog I came across a quote from HG Wells which said that “Human History becomes more and more a race between education and catastrophe” – so a lot like retirement provision then.
Neil Copeland is director at Dalriada Trustees
Human History becomes more and more a race between education and catastrophe
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