personal finance

Pensions: We’re not all in this together

The furlough scheme in the UK is coming to an end — and the job loss announcements are starting. This week alone, Greene King has said it expects 800 jobs to go. Cineworld has put 5,500 at risk with the closure of its cinemas this week and school trip specialist PGL has said it has to cut 670 jobs — one-quarter of its workforce.

With the new round of regional and national lockdown restrictions, it’s fair to say that these numbers represent the tip of a very nasty iceberg. However, there is one group in the UK that might be worrying less than the rest of us about their immediate futures: politicians.

They may lose their jobs at the next election, of course. But for MPs that’s a few years off (it’s a bit sooner for MSPs). And even if they do, they will leave with something the rest of us would love to lay our hands on and something I’m pretty sure most Greene King and Cineworld workers can barely imagine the joy of: a defined benefit pension scheme and the security that comes with it.

Let’s have a quick look at how this works. Take the Scottish Parliamentary Pension Scheme. For every year they work, members of the Scottish parliament accrue 1/40th of their salary as pension, up to a maximum of two-thirds of their final salary. So, to get the maximum, they need to work for just under 27 years (nice!) After 10 years at work they will get a pension of £16,000 a year.

For comparison purposes, someone in the private sector putting away 11 per cent of the same salary (the amount MSPs contribute to their pension schemes) with the standard employer contribution of 3 per cent in a defined contribution pension could hope to save enough to produce an income of about £4,000, assuming no stock market crashes. Not all public sector pension schemes are as generous as this, of course. But you get the idea.

The key point here is that, from the age of 65, the money will just arrive for politicians in these final salary schemes. Month in, month out, regardless of pandemics, business-blind government policy, recessions, unemployment, stock market crashes, shifting bond yields or trade wars, a dollop of cash will land in the bank accounts of these retired parliamentarians every month for life. Whatever keeps them up at night, it won’t be retirement planning. For that, they can rely on the deep pockets of the state.

You, I’m afraid, cannot. The majority of private sector workers now have the defined contribution (DC) pensions I mentioned above — pots of cash we attempt to build slowly over a career but which change in value with the movement of markets and come with no guarantees of any kind as to value or income on retirement.

Every lockdown announcement makes them more fragile, as evidenced by, say, results this week from easyJet, an obvious lockdown victim. Anyone holding easyJet shares in their pension portfolio has lost 62 per cent of the value of that holding this year so far.

Our only hope of help from the state, beyond, in extremis, pension credits, is a state pension. We also know we can’t rely on that. Anyone in any doubt about that should note that as of this week, you will not get your state pension until you are at least 66. That will move to 67 by 2028 and 68 by 2039. This makes sense, since we are living longer and healthier lives. But it won’t feel good to anyone aged over 50, whose finances and industries have been slammed by pandemic policy.

In June and July, according to the IFS, nearly one in four employees aged 54 and over, who were working before the crisis, were on furlough. Among those still working, one in five were working fewer hours. Among the self-employed, only one in five reported they could carry on their work as normal.

A lot of those people will already have worked the 35 years required to be eligible for a full pension — and be desperate for it. Worry levels are rising: 8 per cent of this age group expect to retire later than they would have before the pandemic.

Overall, according to a study from Hargreaves Lansdown, 64 per cent of us aren’t confident we will ever be able to afford retirement and one in four of us have changed our retirement expectations thanks to Covid-19. Though this study was done in April, things are unlikely to have improved since.

Just to confirm the misery, finance group Sanlam has a survey showing that 30 per cent of Britons “fear an economic crash could hamper their retirement plans”. That’s up from 20 per cent last year, when people’s biggest worry was getting ill. And the most worried age group? The 55- to 64-year-olds, many of whom have DC pensions and no time to build them back up again if it all goes wrong.

Those with DC pensions who reported a fall in their wealth are 6 percentage points more likely to be planning to retire later as a result of the pandemic than those with no DC. I daresay the number is rather higher for those who were relying on income from a hospitality business to finance retirement.

So what’s to be done? How can those of us with DC pensions and uncertain futures find a way to sleep at night? There is a glimmer of hope in the new acceptance of homeworking — something that may translate into longer part-time careers for the over-60s. We should all be aiming to keep a non-investment income going as long as possible.

Other than that, it is about a little pension proactivity. The US stock market makes up nearly 60 per cent of the global stock market by market capitalisation. It’s also extremely expensive. The odds are that if you haven’t rebalanced your portfolio recently you have too much of it — and not enough of the rather cheaper, UK, Japanese and emerging markets.

None of these are total bargains by historical standards — but they are at least relatively inexpensive, mostly offering some sustainable yield and are more attractive than zero-interest cash and overpriced bonds. Public servants have inflation protection built in. Now might be a good time to buy your own in the form of a little gold.

You might also consider asking your MP or MSP to look at a few things that might make you feel better. First, the possibility of taking your state pension early.

Baroness Altmann, a former pensions minister, makes the perfectly reasonable suggestion that those who want or need to take their state pension earlier than 66 should be allowed to do so on the understanding that it is lower than it would be otherwise. You can currently delay getting the state pension in exchange for it being slightly higher when you do get it, so why not do it the other way around?

This is something MSPs can do in their pension scheme, by the way. Should they want to take their pension early, they can do so with the proviso that “it will be reduced by 4 per cent for each year you leave early before age 65”. That seems like a reasonable model for the rest of us to follow.

Second, given that we are supposed to all be in this together, how about a policy that might help some of the more highly paid and pensioned politicians and civil servants really start to know how tough it is? Perhaps they could help out with our dismal public finances while living some of the experience of the private sector by forgoing, say, 1 per cent of their pension entitlement for every month businesses of any kind in the UK are forced to be closed.

They’d say that is penalising them for something that is no fault of their own. I’d say we could argue the toss on that one for a while — but nonetheless the virus isn’t exactly the fault of the nation’s small business owners or DC pension holders either. We’re all in it together. Aren’t we?

Merryn Somerset Webb is editor-in-chief of MoneyWeek. Views are personal. Twitter: @MerrynSW


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