1. The pensions landscape 2010

Evidence on the incomes of existing pensioners shows that state pensions and benefits have the widest reach but that occupational pensions play a very important supplementary role.

The pensioner population and life expectancy

Between 1971 and 2006 the number of people aged 65 or over grew by almost a third, while older pensioner numbers (85 or over) more than doubled to 1.3 million since 1983. On the latest figures (2008) there were 11.7 million people at state pension age or over (65 for men, 60 for women) compared with 38.1 million over 16 but under state pension age, and 11.5 million under 16 (out of a out of a total UK population of 61.4 million).

There are 8.6 million pensioner households out of a total of 25.7 million, including 4.65 million single pensioners and 3.9 million pensioner couples (one or more cohabiting pensioners over state pension age). Single pensioner households are most likely to be headed by a woman who, where that is the case, is 75 years old or over. Life expectancy is growing and we can already expect, on average, to live beyond our mid-80s. The rate of increase should slow down over the next four decades (if improvements in mortality rates slow) but the gap between the sexes will narrow.

Net inward migration has helped keep numbers at or above state pension age to about 300 for each thousand working-age people since the early 1970s. With the agreed increases in the state pension age that pensioner number is projected to rise to 343 by 2051; without it the number would be 495.

Variations in life expectancy make a general increase in pension/retirement ages a problem. The National Pensioners Convention highlights district by district NHS figures revealing that men in Blackpool live on average to 73.2 years — 10.5 years fewer than their counterparts in Kensington and Chelsea; while women in Hartlepool have the lowest life expectancy of 78.1 years, 9.6 years less than women in Kensington and Chelsea.

Years of life expectancy and projected life expectancy at age 65

Source: ONS

Pensioner income

Retired people have different levels and sources of income but state and occupational pensions are their main support. Average income levels for pensioners have been growing but even so there is a stubborn problem of relative poverty affecting one in six pensioners. With the retreat by private sector employers from quality occupational pensions, things could get worse rather than better.

In 2008-09, average gross income was £564.00 per week for a pensioner couple, (£459.00 after tax deductions, £432.00 after housing costs). But averages can distort and median (midpoint) figures are a better guide. Taking net income before housing costs, median income in 2008-09 was £206.00 per week for a single pensioner and £373.00 for a couple. Median gross employee earnings in 2009 was £397.30 per week.

Income isn’t spread evenly, and the spread has widened since the mid-1990s although there is less inequality between pensioners than there is between non-retired households. Among the bottom fifth of pensioner households, net income in 2006-2009 was £197.00 a week before housing costs for couples and £113.00 for single pensioners.

The Association of Consulting Actuaries (ACA) says that for most people, starting pension saving at age 30, private pension contributions of 15% of earnings (say, 10% from the employer and 5% from the individual) through to age 65 “can reasonably be expected to deliver a replacement income in retirement of 60% or more, including their State Pensions”.

Over the last ten years (up to 2008-09) pensioners’ average income after housing costs has grown faster than earnings, by 38% (28% before housing costs) as compared with 12% earnings growth. These figures reflect a 24% growth in average occupational pension income, for those existing pensioners who have occupational pensions, and a 22% growth in average benefit income. Despite this, in 2008-09 an estimated two million pensioners in the UK were living on 60% of median income or less (using a median figure after housing costs which takes account of household size), the usual indicator for relative poverty.

Although that level of pensioner poverty is down by almost a third (from 2.9 million) since 1998/99 it is still too high. Over 30% of households of single people aged 60 or over in England (one million households) are in “fuel poverty”, spending more than 10% of their income to maintain a satisfactory level of heating in their main living area and other occupied rooms.

For the National Pensioners’ Convention, these figures are an indictment in particular of the state pension and benefits system. It’s pre-election report, The Politics of Pensions, argues that numbers in severe poverty (less than 40% of median population income) and persistent poverty (below 60% median population income for three out of the last four years) have grown.

In addition, spending patterns are different and pensioner inflation is “higher than for any other age group”, charity Age UK points out. Indexation of pensions and annuities is one of the issues at stake in pension planning. In 2007, the average weekly expenditure of households headed by someone aged 65 to 74 was £321.00 of which over 30% was spent on food, domestic energy bills, housing and council tax. For households headed by someone aged 75 or over average expenditure was £218.00 per week, almost 40% going on food, energy bills housing and council tax.

Sources of income

The Pensions Service points out: “The basic state pension will give you a start, but to have the lifestyle you want, you may need to think about saving more”. The statistics show that most existing pensioners had some other income in 2008-09:

• almost all (95%) pensioner households had income from the state pension at an average of £116.00 per week for singles and £162.00 per week for couples;

• six out of ten (59%) of pensioner households had income from an occupational pension (up from 40% in 1979) worth £168.00 a week on average: The median was lower at £104.00 a week;

• one in seven households (15%) had personal pension income. Taking occupational and/or personal pension income together, 68% of pensioner households had income from private pension sources; and

• (30%) pensioner households received at least one income-related benefit such as Pension Credit, Housing Benefit or Council Tax Benefit . Almost a quarter (23%) of pensioner households get disability benefits (worth £58.00-£75.00).

With state pensions and benefits reaching more pensioners than occupational pensions, state benefits accounted for 43% of the average gross income of pensioner households while occupational pensions accounted for 25%.

Only a relatively small group of pensioners have income from earnings but that contributed 19% to pensioners’ average household income. Almost three quarters had some investment income (9% of average income) but for half that was worth only £12.00 a week or less.

It may be helpful to think of pensions in “lifetime” terms, particularly where people are weighing up the value of joining a pension scheme. Even with a state pension of as little as £100.00 a week, over a 20-year period (assuming that nothing else changes) that would total £104,000; and with an occupational pension also worth around £100.00 a week, that would double to £208,000.

Despite all the bad press, pensions are still seen by 44% of people in the NAPF Pensions Survey as the best way to save for retirement. By contrast, only 18% said property would be the best way to save, and 10% Individual Savings Accounts (ISAs).

Non-state pensions

The ability of non-state pensions to supplement pensioner income depends on how many people they reach and the level of benefits they receive. Tax and means-tested state benefits also affect actual income levels. At the time of the Pension Commission’s final report in November 2005, 9.6 million people were under-saving for retirement; 46% of those in work not contributing to a private pension. Today the Personal Accounts Delivery Authority (PADA) which is overseeing the “2012” reforms says that seven million people are still not saving enough.

The number of working-age people actively involved in a non-state scheme has been falling in recent years but the picture is clouded by the different types of pension schemes; inclusion of existing pensioners in some of the published statistics; different trends in different parts of the labour market (public sector employment and pension scheme membership has been growing, coverage in the private sector declining); and the different statistical sources available.

According to the Occupational Pension Schemes Survey Annual Report (OPSS) published in October 2009, 27.7 million people belonged to occupational pension schemes in 2008, up by one million compared with 2007. That’s equivalent to just over half of the entire 16-plus population of 49.8 million (including non-working and unemployed people and students).

What the OPSS figures include:

• Active (employee) members (nine million, up from 8.8 million in 2007-08) currently building up their pension entitlement; pensions already in payment (8.8 million, up from 8.5); and preserved entitlement (9.9 million, up from 9.4) (no longer contributing but not yet claiming).

What the figures don’t include:

• Group Personal Pensions and Stakeholder Pensions that have employer contributions. Therefore these figures significantly under-state employer support for pensions in the private sector. Private sector employers are increasingly choosing such schemes in preference to occupational pensions (see below). They also exclude private pensions that workers may be saving in, to which employers don’t contribute at all.

What else the figures don’t reveal:

• The figures do not distinguish between members of schemes that are now closed (no-one else can join) and those that are still open; nor do they indicate what type of scheme people belong to (see below).

Pension scheme types

An employer must provide access to a pension scheme (e.g. a stakeholder scheme) if they employ more than five people but until the 2012 reforms begin to kick in employers don't have to contribute. However, an employer or group of employers can choose to set up an occupational pension scheme to provide pension and other benefits for their employees.

If the employee dies, the scheme may provide benefits for their dependents. These can either be funded by contributions from the employer alone (“non-contributory”) or from both employer and employee (“contributory”). The three main types are:

Defined benefit (DB): The level of benefits is defined in the scheme rules; funding (including investment income) is sufficient to provide those benefits on retirement. Examples include final salary and career average.

Defined contribution (DC): The level of contributions is defined; the proceeds (including any investment income) are used to purchase a pension (annuity) on retirement. Also known as money purchase.

Hybrid: A scheme combining elements of both DB and DC.

Most of the larger occupational schemes are established on a Trust basis but DC schemes can also be established by contract between an individual and a provider. In addition to, or as an alternative to, any of the above, employers can also provide retirement benefits by setting up a Group personal pension scheme (GPP) or a Stakeholder pension, or may contribute to a personal pension, or a self-invested personal pension (SIPP).

Stakeholder pensions, introduced in 2002 to coincide with a requirement to offer employees access to an occupational scheme, are low-cost. Employers were not required to contribute to Stakeholder schemes and their introduction caused only a small “blip” in the declining level of workplace pension coverage.

There are a wide range of statistics, all giving different figures, but the general trend is away from quality pension schemes towards riskier arrangements likely to be less well funded. It is a complicated picture but the TUC argues that, even on the most generous definition, more than 60% of the private sector workforce are not saving in an employer-supported pension and are likely to face poverty in retirement.

The Annual Survey of Hours and Earnings (ASHE) show that active membership of occupational schemes has fallen. The proportion of UK employees who were members of an employer-sponsored pension scheme dropped from 55% in 1997 to 50% in 2009. The proportion in defined benefit (DB) schemes fell from 46% to 33% (including members of public sector pension schemes). The proportion in defined contribution (DC) occupational schemes also fell, from 9% to 6% but that was offset by an increase in employer-sponsored personal pensions, including stakeholder pensions which took overall employer-supported DC membership up from 10% to 16%. In 2008, 45% of self-employed men working full time in Great Britain belonged to a personal pension scheme, down from 64% in 1998-99.

Looking at statistics for 2007, there were 8.8 million active members of occupational pensions, most of them still in DB schemes (7.9 million), but also 6.9 million individuals contributing to personal pensions (which are DC-type), bringing the total active membership of DC schemes to an estimated 7.8 million. Two thirds of the active DB members were in public sector schemes while only a third were in the private sector. DC schemes accounted for around a quarter of the active membership of private sector occupational schemes (0.9 million). More than half of the private sector DB members (1.5 million out of 2.6 million) were in schemes closed to new members.

DC schemes tend to be smaller. As at 31 March 2009 there were 53,697 occupational DC schemes registered with the Pensions Regulator, 6,634 DB schemes and a further 1,973 hybrid schemes. Private sector membership remains concentrated in a small number of large schemes: 89% were in 1,722 schemes with more than 1,000 members and 63% in 288 schemes with more than 10,000 members; 92% of the DC schemes had fewer than 12 members.

Coverage of DC schemes is not growing fast enough to fill the gap left by the continuing closure of DB schemes. Between 2005 and 2008 there was a 5.1% drop in the proportion of the working population in the private sector in membership of a DB scheme (18.6% down to 13.5%) and only a 1.9% growth in membership of DC schemes with an employer contribution (19.9% up to 21.8%) — with these DC numbers falling between 2007 and 2008.

Inequality

There is considerable inequality in access both to state and occupational pensions:

Gender: Women often have a shorter working life, are more likely to work part time and may not qualify for a state pension or don’t sign up when they get the opportunity to take up employer contributions to pensions. Women tend to have lower pension incomes than men but are supported to a greater extent by means-tested benefits. A single male pensioner had a median net income before housing costs of £219.00 per week in 2008-09 compared with £203.00 for a single female pensioner. In September 2008, 34% of female pensioners (2.3 million) received 60% of the full basic state pension or less, compared with less than 2% of male pensioners. Reforms introduced under the 2007 Pensions Act should improve state pension levels for women (see page 16).

Age: Half of the population between 50 and state retirement (pension) age are believed to be under-saving for their retirement. Only slightly more than a third of young people in their 20s contribute to pensions; and only half of employees under 30 who are offered an employer pension take it up. On average, older pensioners have lower incomes than younger pensioners.

Minority ethnic workers: Under-represented in work and amongst higher earners, they are over-represented among the ranks of those most at risk of under-saving. On average, as minority ethnic pensioners they are less likely to receive occupational, personal pensions or state pension and more likely to have lower incomes.

Non-standard employment: Part-time work, economic inactivity, unemployment and self-employment can all be factors in low pension entitlement.

Occupation: Employees in higher managerial and higher professional jobs are more likely to have a pension scheme than those in lower supervisory and technical, semi-routine and routine occupations. Directors of the UK’s top companies can expect to retire on pensions of nearly £250,000 a year (Pension Watch, TUC).

Earnings: The lower their weekly earnings the less likely full-time employees are to belong to an employer-sponsored pension scheme. Very low earnings can affect entitlement to state pensions too.

Industrial sector: Public administration, defence and social security is the sector with the highest proportion of employee pension scheme memberships followed by the utilities, education and finance. Accommodation and food services have the lowest proportion, while other at-risk sectors include construction, retail, hotels and restaurants.

Low or irregular private pension contributions: DB benefits are often linked to service (as well as salary) while DC pension funds benefit from compound interest, so irregular contributions can mean lower pensions.

Early retirement and a longer lifespan: Fewer years of contributions to top up state and private pensions and more years of retirement for savings to last, can mean lower income for those living to an older age. Even if their pension is “indexed” it may not keep up relative to average earnings for those still in work.

Where you live: Pensioners in the South East of England and London have higher incomes, on average, than other parts of the UK, but average benefits income varies much less between regions.

Co-habitation: Pensioner couples on average have around two and a half times the level of occupational pensions and investments as single pensioners.