The Edge

Richard Northedge takes on corporate finance

Good reasons for shunning pensions

The number of people paying into pensions is the lowest for half a century. Are the workers shunning such schemes wise or foolish?

Actually, the fall to 8.2m contributors is the lowest since record began in 1953, so that figure is probably the lowest level ever. And it is private sector-workers who are risking their future: the number of public-sector contributors has risen to 5.3m. The official figures show what a divided world we live in.

The number of private-sector contributors has halved in a decade to just 2.9m. But they have lots of reasons for putting off pension payments, not least the lousy returns since the millennium. If the performance was better, people might not notice the fees charged for losing their money. And while pensions have mainly avoided scandal, the general mistrust of anything financial does not encourage people to hand over cash.

But when purses are squeezed, people have better things to do with their money – not least pay the mortgage or rent, repay student loans or simply meet living costs.        However, the main reason for the collapse in pension payments is the lack of compulsion and the private-sector’s move from final-salary schemes to money-purchase plans.

The public-sector has held up because the state still operates defined-benefit schemes: for the worker, they are an insurance against poor investment returns and longer lives because the employer takes the risk and makes up the losses. Once the private-sector workers have to bear their own risks, the reasons for using a formal pension plan reduce rapidly.

Many prefer to look after their own nest-egg – hence the popularity of buy-to-rent properties – keep assets in more liquid forms than a pension pot that cannot be raided, or simply postpone the day they start saving. Given the poor performance, that is not a totally irrational strategy.

The government hopes its auto-enrolment scheme will address the compulsion issue. From late 2012, workers at large companies will have to opt out if they don’t want to contribute and the scheme will be rolled out to all firms over six years.

But given that so many in the private sector now think opting out makes sense, even this scheme may not reverse the trend. And in the short-term, the government would rather people kept on consuming than put their money into the stockmarket.

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