It is likely that the very concept of retirement will become more of a myth than a reality for the majority of future generations of people, as governments around the world realise the concept of welfare for all was never a sustainable one'

‘If one thing is clear, it's that everyone has to think about saving for retirement. We've had our wake-up call, an undeniable indication that the UK government intends to withdraw the many state benefits we have enjoyed for over 60 years. This welfare state, once the envy of the world, is coming to an end'

I am not really a ‘pensions person', believe it or not. Coming into this sector from a technology services background, I have been thrust into the world of pensions on the back of the government legislation that requires all employers to automatically enrol their staff into a workplace pension scheme, as have many owners and directors of smaller businesses. Although I'm not meant to say it, I have to admit I don't quite ‘get' pensions or understand why they are so complicated.

Like most people I find that as you dig a little deeper, the subject starts to get very boring, very quickly. Want proof? The next party you're at, mention to someone that you are in pensions and I can guarantee, you will find yourself spending the rest of the evening alone or at best (possibly worst) left talking to the encyclopaedia salesman in the corner...For those people you meet who do have a pension, ask them if they read their annual statement and if by surprise you find someone that has, ask them if they understand it. I suggest that less than 5%, quite possibly as little as 1% of the population, understand pensions. You will find those that do working for bigger businesses, as part of the large UK financial services sector.

Savings versus pensions

My youngest son Obe, currently involved in some social media work for us over his university break, asked "Why do we call it a pension?" A valid question to which I had no answer. I think his question reflects the views of many younger people in the UK and thus we can only draw an initial conclusion that the industry runs the risk of alienating the younger work force, on which the country will depend. "Should it not be called savings, with focus on retirement savings?" he went on to say. In Obe's opinion, the only way to get younger people engaged is to talk in a language they understand.

Obe suggests that everyone understands and relates to the concept of savings and interest, far more than the idea of a pension, to which I have to agree. The word pension has a lot to answer for, alienating many people (young and old) and bringing with it a lot of baggage as well as much negative publicity. Pensions are viewed as very complex and often very poor value for money, especially when it's time to use your ‘pot of money' to buy a product called an annuity that will drip feed money to you in retirement.

We all remember the headlines disgracing company directors for running off with the pension pot, for corporate raiders buying businesses to get their hands on the pension fund and for fat cat insurers taking large fees for not doing very much at all, getting paid to make poor investment decisions that ultimately erode the amount you have left in your ‘pot'.

A pension today is a form of tax free savings that should prove beneficial in retirement. Provided you pay enough in and assuming you get a reasonable return, the fund grows, the amount you pay in should increase over time and you are not being

charged too much to manage your money. Let's hope that one day the UK government will allow tax relief when you are ready to take money from your savings pot.

Pensions and a changing world

In my view, the biggest problem for pensions is that the world around us is changing quickly but the concept of pensions hasn't kept up, or changed at all for that matter, in over 30 years. Global shifts in demographics and geo-political events are reshaping the very nature of our lives, none more so than the entire concept of retirement: actually having enough money put aside on which to retire. Strange to think that prior to the introduction of the welfare state, aimed at pulling people out of poverty in a post war period, there really was no concept of retirement, or even taking time off for leisure activities.

The fact of the matter is average life expectancy in the western world by the middle of this century will increase to 88 for both men and women. It is likely that the very concept of retirement will become more of a myth than a reality for the majority of future generations of people, as governments around the world realise the concept of welfare for all was never a sustainable one. From a UK perspective, I believe this is directly linked to our membership of the EU, equalisation of fiscal policy/union and free movement of labour. The combined factors have not only diluted our Britishness but also placed unnecessary strain on all of our public services, with ever more people taking out of the system before paying in.

Should these changes influence your decision to save for your retirement? Absolutely not. The train wreck will happen for those who expect to rely on a state pension, only to find out the hard way that this help from the state does not materialise. We are experiencing the rapid erosion of the welfare state, accelerated by recent economic hardship and the elimination of real wealth during the banking crisis. We all need to make some provision for the future.

Saving for retirement

In October 2012, new UK pension legislation came into effect that requires every worker in the UK to be automatically enrolled (so called ‘auto-enrolment') into a qualifying workplace pension scheme. This was bought in as another step towards removing the state pension, and further confirmation that people in the UK simply do not save enough.

It is time for a change in attitude, in culture and more importantly in our behaviour, if we are going to cope with an ageing population who are often unable to fend for themselves. I was shocked to discover that approximately 30,000 elderly people in the UK (or nine per hour) die from extreme cold each winter, simply because they cannot pay for their fuel bills. In addition, a large proportion of the elderly live below the poverty line, despite many of them having paid into the system for over 50 years.

When the welfare system was initially established on the back of Sir William Beveridge's report in 1942, there were initially 45 workers paying into the system for every one person drawing a pension. The British scarcity and ‘fair-play' mentality contributed to the welfare state swimming with money, which resulted in the government creating a large administrative overhead, costing 6% to 7% to administer what is paid in. Interestingly, as a pension company we are expected to do this for just 0.75%.

Today, the number of people paying into the system has fallen to 3.2 and is expected to fall further to 2.8 by the middle of the century. Does this mean the safety net we've relied upon is so weak that some people are already falling through it? The data would suggest the answer is yes. I would argue that the welfare state as a concept has created

generations of people who have sat back with no intention of contributing into UK PLC, generations of people that despite this, have expected to be looked after at every stage of their lives.

Auto-enrolment is the first phase of a series of broader pensions reforms and is a good starting point; it's the beginning of government attempts to force UK workers to start saving. If we take a look around the world we find many good examples of cases where legislation forcing a change in behaviour has worked well: in Australia with super-annuity and in Sweden, Denmark and even Uruguay, there are examples of similar and highly successful changes which are enforcing people to save for retirement. And it's working...

Saving more

The introduction of auto-enrolment legislation will affect around 11 million  workers across the UK and this is only the beginning; various groups of workers including the self-employed (of which there are estimated to be 4.5 million) will also be gradually brought into the auto-enrolment net.

Post-elections we will see the rapid increase of compulsory contribution levels, for both employees and employers, as well as a rapid increase in the levels and frequency of smaller businesses being fined. The current mandatory contribution levels of 1% employer and 1% employee, rising to 3% employer and 5% employer by 2018, will simply not contribute enough to the savings pot to provide a comfortable retirement income. Many similar schemes around the world have set their mandatory contribution levels considerably higher. In Sweden for example, compulsory contributions stand at 18.5% which along with voluntary contributions of 4%, bring their total pension savings up to 22.5%. In Denmark contributions levels are 12% to 18% and in Poland it is 9% for both employer and employee.

The future

If one thing is clear, it's that everyone has to think about saving for retirement. We've had our wake-up call, an undeniable indication that the UK government intends to withdraw the many state benefits we have enjoyed for over 60 years. This welfare state, once the envy of the world, is coming to an end.

It is time for the government to come clean and be transparent with people. UK workers need to be told that unless they save a much larger proportion of their income each year, they will not be able to attain the retirement lifestyle they may expect, due to the lack of supplements and tops-ups from the state which were previously used to plug the gaps in peoples finances.

We are ultimately all on our own.

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