The Jersey Annual Social Survey 2015 results indicated that just over half of adults are worried about their standard of living in retirement, and 41% do not think that they will have a good retirement.
The States of Jersey have recently commenced their review of the future for Social Security and income in retirement. Guernsey are a couple of years ahead with a proposed secondary pension scheme due to begin a phased launch from 2020 with the final contribution levels reached by 2030. The proposed Guernsey secondary pension would be an auto-enrolment scheme, similar to the UK concept, but with some clear differences in scope and collection methods.
Why are governments reviewing retirement provision?
The main factors affecting the future levels of retirement income are contribution levels and the expected longevity of those reaching retirement:
- Average life expectancy has increased quite considerably due to factors such as medical advances and improved nutrition. This has resulted in an increase in the cost of providing an income for life in retirement. Retirement periods of 20 to 30 years are now a real possibility!
- One of the effects of the increase in the cost of purchasing an income for life, or annuity, is the reduction in the level of income that the pension fund buys, i.e. poorer pensioners.
- This increase in cost has also made annuities less attractive resulting in more people choosing the drawdown or annuity equivalent option. With this option there is no guarantee of the levels of income that will be available, or that the pension will last throughout retirement, increasing the risks of poverty and Social Security support.
- Pension splitting is also available where part of a fund can be used to purchase an annuity and the remainder used for annuity equivalent. This illustrates the importance of financial advice in this area.
- For those lucky enough to be members of a Defined Benefit Scheme, the increased cost of providing an income retirement falls on to the employer, hence the mass closure of these schemes to new members, future accrual or move from final to average salary calculations.
- It is clear that the number of pensioners with Defined Benefit Schemes will steadily decrease over the next 20-30 years, leaving a “Black Hole” in retirement provision, unless drastic measures are taken!
Jersey’s review of retirement provision will look at the future of the State Pension. With an ever increasing retired population, resulting in an increased state burden it is inevitable that either the state retirement age will need to further increase, the real value of the State pension will need to be reduced, Social Security funding contributions will need to increase or there will need to be a combination of changes to provide the necessary state funding for the State pension. The review will also consider secondary pension provision.
For most, the State pension will not provide the level of income required or desired in retirement and therefore secondary provision is required. Although there are other non-pension related ways to invest and provide for retirement this article will concentrate on pension related matters.
What are the possible solutions and opportunities?
- Following the example set in the UK, auto-enrolment legislation would provide a positive nudge to ensure minimum levels of retirement provision are gained unless an opt-out is taken. Whereas in the UK the scheme covers the employed, in Guernsey the proposed scheme also covers self-employed and has a voluntary option for the unemployed.
- This would be a major project for the States to undertake and raises lots of questions around:
- Who would be included?
- Employer and employee minimum contributions
- Guiding employers through any changes including improvements to IT and Payroll systems
- Who would manage and administer any state second pensions
- Public awareness and policing of non-compliance
- How do you ensure employers do not encourage employees to opt-out?
- Types of investments and retirement options available
- Providing advice to employers and employees
- Assessing current pension schemes against the new requirements
There would no doubt be an increase in costs, especially for small and medium sized enterprises which could have a knock-on affect to employment levels, redundancies, payrises and prices?
A pensions regulator in Jersey?
- The Pensions Regulator (TPR) in the UK is the regulator of work-based pension schemes. It works to ensure that pension schemes are adequately funded and run in the best interests of retirement savers – and that employers meet their obligations by enrolling staff into a pension scheme and making contributions.
- A Jersey pension regulator could take on responsibility for auto-enrolment and ensure members interests where being protected. The regulator could also take on the responsibility for personal pensions.
- But, how would this be funded?
Raising the minimum retirement age from 50?
- This may either reduce the risk of pension pots running dry, or increase the income levels available.
- But would also reduce the flexibility and maybe attractiveness of pensions and therefore be counterproductive!
- This would also need to be phased in over time to not disadvantage those close to retirement.
- This is currently available to those who meet the minimum income requirements, i.e. have a guaranteed income for life at least equivalent to the current State pension and increasing by at least 3% per annum or using the actuarial order 2002.
- Would removing the minimum income requirements in retirement and opening up flexi-access to all, encourage higher saving levels, resulting in higher retirement provision?
- Or would this encourage over-spending in retirement and an increase in the number of pension pots running out of money?
- Are those in drawdown already overspending due to the current 150% of GAD rate maximum income allowance which has the affect of speeding up income withdrawal? Should this be reviewed and moved back to 100%?
Changes to the £150k “excess income” rule?
- Currently tax relief is reduced and eventually removed for those earning over £150,000 p.a.
- With no or limited tax relief available it is difficult to see why you would continue to save in to a pension, therefore discouraging high earners from saving for retirement. It is also difficult to understand why this rule exists?
- Should couples with one earner above £150k p.a. and one non-employed person be allowed to contribute and still receive tax relief?
Contract based pension legislation?
- The current pension legislation is not designed to provide for a low cost personal pension. The Retirement Trust Scheme legislation is trust based and expensive for trustees to administer. This results in annual fee levels that are not suited to those just starting to save for retirement or with smaller fund values.
- There is a need for a starter pension, similar to the UK stakeholder concept, allowing for smaller contributions, simple investment options and low costs and fees.
Residential property investments?
- Lots of people prefer to invest in property rather than stock markets. Would allowing residential property as an allowable investment within Jersey pensions encourage increased retirement provision?
- Or would this simply cause liquidity and other issues for those not fully understanding the implications of these investments.
It is clear that the changing demographics of the population in Jersey, as in most other countries, is forcing a review of State and personal retirement provision. However, agreeing how and what changes need to be implemented requires further discussion.
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Courtesy of 20/20 magazine. Click here to view the publication.