Welcome to the Pensions Reform Group

"The Universal Protected Pension we put forward is the only workable scheme that guarantees to break the link between retirement and poverty" - Chair of the Pensions Reform Group, Rt. Hon. Frank Field MP.

The Pensions Reform Group was established in 1999 with membership drawn from politics, industry, academia, voluntary bodies, and other stakeholder groups. Our joint endeavour is to begin a serious and detailed debate on banishing pensioner poverty from our shores.

Latest News & Updates

Monday, 31 January, 2005

Ralfe challenges Turner report: Former Boots executive says the thinking in the Pensions Commission analysis is flawed

John Ralfe, an independent pension consultant, has called into question the thinking behind Adair Turner's Pensions Commission report, and said the analysis was incomplete at best and flawed at worst.

In a research note written for RBC Capital Markets ahead of today's deadline for responses to the report, he said the Commission's acceptance of the "conventional wisdom" that the risk of holding equities decreases over time undermines its analysis of the advantages of a funded pensions system over a pay-as-you-go system.

He said the same arguments were being used to support President Bush's plans for reform of the US social security system but were suspect and should be challenged.

Mr Ralfe is well-known for his views on equities versus bonds, having been the architect of the switch to bonds by the Boots pension scheme in 2001. He said the belief that equity risk declines with time is the driver behind much of the investment advice for defined benefit pension schemes. It also lies behind the approach to personal investing, encouraging people to hold a higher proportion of their savings in equities the younger they are.

The problem with this approach is that, although it recognises the risk of holding equities, it ignores the size of any loss, failing to distinguish between a 10 per cent and a 90 per cent loss.

"Investors should be interested not just in the likelihood of outcomes, but exactly how good and bad are each of these outcomes," Mr Ralfe said.In his view, the risk of holding equities does not decline over time, and the expected long-term outperformance of equities over gilts is not a "loyalty bonus" but a reward for risk.

He said the proper measure for equity risk is the cost of buying insurance, in the form of an equity put option, against the risk of underperformance.He cites the work of Professor Zvi Bodie, of Boston University, who has calculated the theoretical price of a put option as 8 per cent for one year, 25 per cent for 10 years and 35 per cent for 20 years.

Taking all this into account, Mr Ralfe is concerned that many people in defined contribution pension schemes are taking more risk than they realise.Most members choose "lifestyle" funds where their contributions are invested mainly in equities until five or 10 years before retirement, when they begin to be switched to a mix of fixed interest and cash.But the split between equities and bonds should be a matter of each individual's risk tolerance rather than the length of time to retirement."

Much more thought must be given, especially by the retail fund management industry, to the optimal design and practice of cheap and transparent DC savings vehicles," said Mr Ralfe.There must be something wrong with a system where the best outcome for savers keeps them in caviar for their retirement, but the worst leaves them with dog food, he said.

Other responses to the Pensions Commission report are less challenging, but vary in their analysis of the best way forward.The Association of Consulting Actuaries favours the retention of a voluntary system, based on a higher basic state pension that meets essential living costs paid at a later age, leaving individuals free to build private provision on top.

It said this approach should be more successful than a compulsory regime likely to lead to universally low contributions.Other commentators are in favour of a compulsory element to the system.

Actuarial consultant Punter Southall has argued for a minimum level of retirement income funded partly by compulsory contributions from both employers and employees.It said improving voluntary pensions contributions would not be enough on its own, making compulsory contributions or higher taxes inevitable."

Providing a higher state pension by raising taxes would be both politically unacceptable and would represent poor value for money, leaving compulsion as the only viable way of ensuring that all pensioners have a decent standard of living in retirement," said Danny Vassiliades, principal at Punter Southall.

Friday, 28 January, 2005

Home "must not be used as pensions" says NIESR

Your house is not your pension - unless you want to ruin your children's future, according to a think-tank.

The National Institute for Economic and Social Research will today identify a shortfall in savings of between Pounds 16.5bn and Pounds 66bn.

It will call on the government to take action to raise savings levels because people are not putting enough aside to fund themselves through retirement.

Martin Weale, the institute's director, challenged the notion that capital gains could substitute for savings."The idea that my house is an effortless way of paying for my pension is wrong. It's a burden on younger people," he said.

Mr Weale said the idea - shared by the Treasury - that the low level of savings was not a great concern because of capital gains on assets, was a "fallacy".

When interest rates fall, the rising value of assets make people feel better off. But people fail to take into account the fact that falling interest rates also mean they have to save considerably more to enjoy the same standard of living later in life.

Britain has one of the lowest rates of net national saving in Europe. But in December's pre-Budget report, the Treasury argued that "traditional measures of aggregate saving . . . often fail . . . to highlight the positive impact asset growth has had on households' balance sheets in recent years. Broader measures, for example, including capital growth indicate that saving behaviour has been more robust".

The institute calculated a savings gap of between Pounds 16bn and Pounds 66bn. The lower figure is based on an assumption that house price inflation is caused by a fixed supply of land - enabling people to lock in capital gains.

The higher figure assumes that house prices have been rising because of a failure to invest - such as failing to build new homes. The Pensions Commission said last year that houses might not provide an alternative source of income in retirement - except for those who inherited a property. This was because owning a home provides a hedge against volatility in rents and house prices; selling up would require pensioners to give up their right to rent-free living.

Last week Mervyn King, Bank of England governor, highlighted the problem of low national savings.

"Over the next few years the transition to a higher national saving rate is likely to imply a switch of resources from consumption in the private and public sectors to investment and net exports," he said.

"It will not be easy to achieve that while keeping inflation on track to meet the target and maintaining steady growth in output."

Thursday, 27 January, 2005

TUC protest over pension proposal

The TUC is to make Friday, 18 February, a day of campaigning against proposed government plans to make changes to public sector pensions.

Of particular union concern is the government's determination to increase the retirement age for all public sector workers.

It comes after the NHS employers group said health service workers may see their retirement age go to 65 from 60.

Unions are also angry at plans to alter the way pensions are calculated.

Health service union Unison said its members had reacted with "anger and dismay" to the proposed NHS plans.

We are determined to keep up the pressure on the government

TUC General Secretary Brendan Barber Back in December the Public and Commercial Services (PCS) union, said it might consider strike action over the government proposals.

The government wants to base pensions on an employee's average salary throughout their service. At present, pensions are calculated according to final salary levels.

The government has said the changes are about making the pensions system fairer, particularly for the lower paid, and not a cash-saving measure.

The TUC has been calling for a "high-level" meeting with government ministers.

"This issue is not going to go away," said TUC General Secretary Brendan Barber.

"Unions and their members are very angry at the changes the government is proposing. "

There is enormous concern at the impact these proposals will have upon the lives of millions of public sector workers.

On the day, the TUC will organise local rallies and other campaign events, and put pressure on local constituency MPs.

To coincide with the campaign day, the TUC is also to seek a meeting with David Miliband, the Cabinet Office minister with responsibility for the Public Services Forum.

If implemented, the proposed changes would apply to new civil servants joining from 6 April 2006.

It would apply to current employees from 1 April 2013 - they would not lose pension rights earned prior to that date.