Britain's
broken pension system is going to fail my generation and I want
something to be done – before it's too late. Radical reform is needed
now, or millions of young people will be in serious danger of a poverty
stricken old age.
There is so much wrong with pensions it is hard to know where to begin. They are complicated, opaque and inefficient, so it's no surprise that young people don't trust them. The government knows this, but has been tiptoeing around the industry and its bloated profit margins for too long. Its failure to make the industry play fair is seriously threatening the future security of young people, while money managers enjoy champagne lifestyles and get to keep their shareholders smiling for a bit longer.
Enough is enough. It is time to remove under-30s from pensions altogether. Instead they should be given the chance to save into a new "giant funds" system which is efficient, transparent and will give the best possible value for money in building up the nest-egg they will one day have to rely on.
People currently in their 20s face a bitter cocktail of financial pressures which means they are less able to afford pension contributions than previous generations. This means the precious little money they do put into pensions needs to go a lot further.
Young people are establishing their adult lives in the wake of the biggest recession for 100 years, and they will feel the fallout for years to come. Consistently high youth unemployment means many are struggling to find work and around 941,000 people aged 16-24 were still unemployed in October last year.
Meanwhile, those who have found work are being paid less. The median income of people in their 20s fell by 12% between 2007/08 and 2011/12 (allowing for inflation), according to Institute of Fiscal Studies (IFS) research.
And while salaries are shrivelling, rent and house prices are soaring out of control. Comparing ONS data from 1993 and 2012 is shocking: the average cost of housing for 20-somethings has jumped from 22% to 35% of salary in that time. In addition, the first-time-buyer ratio of house price to 20-something earnings has more than doubled, from 3.10 in 1993 to 6.09 in 2012.
Paying back student loans also causes extra pain for a growing number of young people. Someone graduating with an average post-2012 student loan of £46,500 and a salary of £21,000 (a typical starting salary) could actually pay back £103,404 in student loans over the next 30 years, with repayments escalating from £0 a month to more than £600 a month (in the 30th year).
But the drying up of young people's disposable income hasn't stopped the government auto-enroling them into workplace pensions with a minimum employee contribution of 4% of salary. The estimate that £40bn of pension money is held in schemes that are poor value for money (Office for Fair Trading), and the fact that the true cost of building up a pension is not even known, hasn't held them back either.
This makes me feel uncomfortable: many of us are being sold rotten fish and yet no one is able to smell it on their plate. Young people must save more for retirement, but before they dig deeper in their pockets, the government must stick out its neck and force a pensions revolution. A clean break from pensions and a fresh start for young savers is what is needed to restore trust, confidence, and ultimately better build pots of money.
Instead of people saving into small stock-market-linked pension schemes, a controlled number of giant funds should be created as retirement savings vehicles for under-30s.
These giant funds could use huge economies of scale to reduce fees, and a smaller number of funds would make it much easier for the press and the public to scrutinise them – and therefore harder for pension firms to conceal bad practice.
This should coincide with firms coming clean about the real cost of pensions. Showing savers 100% of the annual fees they pay in one simple figure would make it possible for pension savers to check whether or not they are getting good value for money.
Some of the giant funds would be collective schemes – Scandinavian-style pensions that allow retirees to draw their retirement income straight from the scheme rather than having to buy an annuity or go down the income drawdown route. Historic data suggests collective schemes provide pensions that are around a third bigger than the individual arrangements we currently have. And, encouragingly, ministers are planning to introduce them in the UK.
But if a new system is to win over the public, the name "pension" must go down with the ship. The word is stained with connotations of mistrust, disappointment and confusion, and is entrenched with the word "pensioner" – which inconveniently reminds us of the old people we like to pretend we'll never become.
I've had a go at rethinking pensions – you can read more of my conclusions here (pdf). What do you think? Is the current system fit for the future, or do you agree that something has to change?
• Katie Morley is a writer at Investors Chronicle
There is so much wrong with pensions it is hard to know where to begin. They are complicated, opaque and inefficient, so it's no surprise that young people don't trust them. The government knows this, but has been tiptoeing around the industry and its bloated profit margins for too long. Its failure to make the industry play fair is seriously threatening the future security of young people, while money managers enjoy champagne lifestyles and get to keep their shareholders smiling for a bit longer.
Enough is enough. It is time to remove under-30s from pensions altogether. Instead they should be given the chance to save into a new "giant funds" system which is efficient, transparent and will give the best possible value for money in building up the nest-egg they will one day have to rely on.
People currently in their 20s face a bitter cocktail of financial pressures which means they are less able to afford pension contributions than previous generations. This means the precious little money they do put into pensions needs to go a lot further.
Young people are establishing their adult lives in the wake of the biggest recession for 100 years, and they will feel the fallout for years to come. Consistently high youth unemployment means many are struggling to find work and around 941,000 people aged 16-24 were still unemployed in October last year.
Meanwhile, those who have found work are being paid less. The median income of people in their 20s fell by 12% between 2007/08 and 2011/12 (allowing for inflation), according to Institute of Fiscal Studies (IFS) research.
And while salaries are shrivelling, rent and house prices are soaring out of control. Comparing ONS data from 1993 and 2012 is shocking: the average cost of housing for 20-somethings has jumped from 22% to 35% of salary in that time. In addition, the first-time-buyer ratio of house price to 20-something earnings has more than doubled, from 3.10 in 1993 to 6.09 in 2012.
Paying back student loans also causes extra pain for a growing number of young people. Someone graduating with an average post-2012 student loan of £46,500 and a salary of £21,000 (a typical starting salary) could actually pay back £103,404 in student loans over the next 30 years, with repayments escalating from £0 a month to more than £600 a month (in the 30th year).
But the drying up of young people's disposable income hasn't stopped the government auto-enroling them into workplace pensions with a minimum employee contribution of 4% of salary. The estimate that £40bn of pension money is held in schemes that are poor value for money (Office for Fair Trading), and the fact that the true cost of building up a pension is not even known, hasn't held them back either.
This makes me feel uncomfortable: many of us are being sold rotten fish and yet no one is able to smell it on their plate. Young people must save more for retirement, but before they dig deeper in their pockets, the government must stick out its neck and force a pensions revolution. A clean break from pensions and a fresh start for young savers is what is needed to restore trust, confidence, and ultimately better build pots of money.
Instead of people saving into small stock-market-linked pension schemes, a controlled number of giant funds should be created as retirement savings vehicles for under-30s.
These giant funds could use huge economies of scale to reduce fees, and a smaller number of funds would make it much easier for the press and the public to scrutinise them – and therefore harder for pension firms to conceal bad practice.
This should coincide with firms coming clean about the real cost of pensions. Showing savers 100% of the annual fees they pay in one simple figure would make it possible for pension savers to check whether or not they are getting good value for money.
Some of the giant funds would be collective schemes – Scandinavian-style pensions that allow retirees to draw their retirement income straight from the scheme rather than having to buy an annuity or go down the income drawdown route. Historic data suggests collective schemes provide pensions that are around a third bigger than the individual arrangements we currently have. And, encouragingly, ministers are planning to introduce them in the UK.
But if a new system is to win over the public, the name "pension" must go down with the ship. The word is stained with connotations of mistrust, disappointment and confusion, and is entrenched with the word "pensioner" – which inconveniently reminds us of the old people we like to pretend we'll never become.
I've had a go at rethinking pensions – you can read more of my conclusions here (pdf). What do you think? Is the current system fit for the future, or do you agree that something has to change?
• Katie Morley is a writer at Investors Chronicle
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