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What
exactly is the problem?
In
a nutshell, there is not enough money salted away in pension funds
to guarantee a comfortable retirement for today's working population.
And
it looks as though the total shortfall may be even wider than previously
thought.
In
the past the government has been forced to admit that official estimates
of the level of pension contributions had been inflated by a statistical
error.
The
upshot is that many employees putting money aside for their old
age may well find that their retirement income falls far short of
what they had hoped.
How
did the pensions industry get into this mess?
The
underlying reason is that medical advances over the last few decades
have greatly prolonged our life span, forcing the pensions industry
to support a greater number of pensioners for longer periods.
Government
figures show that average life expectancy in the UK rose by five
years for men and four years for women between 1980 and 2000.
But
the problem has been exacerbated in recent years by dwindling stock
market returns.
Pension
funds depend on steady stock market returns to pay policyholders.
And
when share prices fall - as they have been doing for the last two
years - it becomes harder for funds to meet their obligations.
Lower
returns have forced most of the big company-run pension funds to
suspend generous schemes which guarantee employees a fixed proportion
of their final salaries on retirement.
Nearly
one-quarter of firms have now set up defined contribution or money
purchase schemes, which do not guarantee the final pension sum and
are therefore less risky for companies.
To
be fair, the problem is by no means unique to the UK.
The
double whammy of an ageing population and tumbling share prices
has hit pension funds in most other European countries as well.
Recently,
France has been hit by a wave of strikes as the government attempts
pension reform.
What
does this mean for the average employee?
It
means that the amount of money they need to put aside in order to
ensure a given level of retirement income is rising steadily.
Experts
say that a 30-year-old man aiming to retire at 65 on an annual income
of £20,000 a year in today's terms would currently need to
save about £260 a month.
This
rises to about £450 for men aged 40.
For
women, deemed more likely to take career breaks, the minimum saving
requirement is likely to be higher still.
What
about the state pension?
There
is still a basic state pension, but at a maximum of £79.60
per week for a single person or £127.25 for a couple, it is
unlikely to fund a comfortable retirement.
The
low level of the state pension partly reflects a concerted move
by successive governments, worried over Britain's rapidly ageing
population, to encourage more people to save for their own retirement.
However,
that plan received a setback in the early 1990s when it emerged
that many consumers were mis-sold new pensions which left them worse
off at retirement than they would have been if they had stuck with
their original scheme.
Some
say the episode has made consumers more reluctant to put their money
into pensions.
What
is being done to tackle the problem?
In
December 2002 the government announced in its pension green paper
plans to offer incentives to workers who choose to work on beyond
the age of 65.
In
addition, from 2006 the retirement age for new public sector workers
is to be increased from 60 to 65.
However,
the green paper was widely criticised for not acting to halt the
widespread closure by firms of employee defined benefit - also called
final salary - pension schemes.
What
is more, in a bid to get consumers to put away more money for their
retirement the government would like to see a host of simple easy-to-understand
savings products launched.
However,
the stakeholder pension, introduced in April 2001, has so far met
with a lukewarm response from consumers.
Some
analysts recommend the alternative approach of raising the minimum
retirement age from 65 to 70 or beyond.
Trade
union groups, in contrast, favour shifting the burden onto employers
by forcing them to contribute towards employee pensions.
A fresh
stock market boom would also help.
But
as the savings gap continues to widen, the search for a solution
is becoming ever more urgent.
Should
I worry if my scheme is in deficit?
A deficit
alone does not necessarily mean there are intrinsic problems with
the company pension scheme.
Most
pension funds have been buffeted by big stock market falls in recent
years and, unless your pension scheme got out of equities and switched
to safer investments, it is likely to have a shortfall.
It
is important to remember that pensions are long-term investments,
and it is likely that when market conditions improve the fund will
bounce back.
However,
you might be asked to make more contributions into the fund.
People
are living longer and there will be increasing demands on the fund
in the future.
Problems
have arisen in the past when a company scheme, already in deficit,
has been wound up.
This
has left many workers with much reduced pensions, even though they
have saved all their working lives.
The
government recently introduced measures aimed at protecting workers'
contributions, so this situation is less likely in the future.
This
shouldn't be a green light for complacency, though, with pension
experts warning people to be vigilant, and take an interest in their
investment's progress.
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