As of April, British citizens from the age of 55 have been able to access their entire pension flexibly if they wish. The reform applies to workplace pensions, which constitute the main part of the pension provision of Britain’s middle class.
The question is: are citizens qualified to make decisions with long-range effects? Daniela Silcock, Researcher at Pension Policy Institute (PPI), fears that four out of ten Brits will make poor investment decisions.
The pension system in Britain is complex, and the reform has made the situation worse. The power and responsibility has shifted completely to the citizens. “Not everyone can afford a private investment advisor. Nor can it be taken for granted that the advisor of your own insurance company looks out for your best interests,” states Professor Nicholas Barr of the London School of Economics.
Barr predicts that the reform will lead to a big pension scandal, which will explode in 15-20 years. Silcock sees some positive sides to the reform: “Competition will generate new pension products.”
Both Barr and Silcock find that the complexity of the pension reform could be facilitated by a user-friendly default alternative, like the one used in connection with the premium pension in Sweden. If one does not want to or know how to invest the pension money, it would be invested in a secure target according to a default alternative. “This would be in the best interest of everyone, but George Osborne (Chancellor of the Exchequer) did not want the default alternative as part of the reform. The government does not want to take the responsibility for failed investments,” Silcock concludes.
The pensions for seafarers will be reformed. The lower retirement ages will gradually be abolished, as will the special accruals and the burial grant. The pension contribution will be similar to that under the Employees Pensions Act.
After a transition period, the retirement ages will be equal to those under the Employees Pensions Act. “The reform will not affect the pensions of the elderly seafarers. The full effects of the reform will apply to the new, young seafarers,” explains Kari Välimäki, Managing Director at the Seafarer’s Pension Fund.
In the future, the employee’s contribution will be reduced and the employer’s contribution increased. Experience rating will be applied to large employers as of 2017.
“The shipyards can affect their pension contributions by taking good care of their employees,” Välimäki points out.
Pension Assets in Demand
In the partly-funded earnings-related pension system in Finland, approximately 1 of 6 euros paid in pension contributions is invested for future use.
In 2014, pension providers paid out pensions to the amount of EUR 24.4 billion.
For a while, pension providers have paid out more in pensions than they have collected in contributions. The investment return is used to cover the gap.
“Thanks to the funding, our pension system is among the leading systems in Europe when it comes to preparing for the ageing of the population,” explains Reijo Vanne, Leading Economist at the Finnish Pension Alliance TELA.
Pension expenditure will be at its highest after 2020, when it will stand at 15 per cent of GDP.
“Pension assets have grown considerably relative to GDP,” says Mikko Sankala, Mathematician at the Finnish Centre for Pensions.
In 1997–2014, the assets have grown from EUR 40 billion to EUR 170 billion.
Consumption among retirees has increased mainly due to growing income levels.
At the same time, retirees consume a proportionally smaller portion of their income.The income differences between retirees and the working-age population has narrowed over the past 30 years according to a study by economists Kati Ahonen and Risto Vaittinen at the Finnish Centre for Pensions.
A considerable change has taken place over the past three decades in the consumption distribution of different age groups. In 1985, the median consumption per age-group was at its highest among the 40–44-year-olds; in 2012, among the 55–59-year-olds.
While the differences in consumption between retirees and the working-age population have narrowed, the inequality between and within these population groups, when measured in consumption differences, has widened.
However, taking public consumption into account reduces the degree of inequality.