A recent report urges the government to stop 'pretending' that the current pension offerings have the capacity to support 30 years of retirement and come up with a simple saving solution which proves as attractive to Britons as the tax-free ISA. The Institute of Directors' research compared Britain's pension system to a 'giant game of Jenga' where even the smallest of movements can result in partial or complete collapse. They stated that it has become 'hugely complex' and 'unattractive' resulting in many savers entrusting other investment tools such as ISAs to avoid the 'forest of regulation'.
In 2007, the amount contributed to employee and individual pensions peaked at £25.6bn before dropping to £22.9bn by 2009. However, ISA investments rose from £35.7bn in 2007 to £43.9bn in 2009/10 showing that people paid almost twice as much into their ISAs than their pension schemes. Recent statistics demonstrate that the ISA's popularity has accelerated further with payments of £53.6bn recorded for 2010/11.
Malcolm Small, Senior Pensions Policy Advisor at the Institute of Directors and author of the report said:
"Traditional pensions are now outdated and increasingly unattractive. Society has changed but pension provision and Government policy have failed to keep up with the new challenge we face. The fact that so many people are either not saving at all for retirement or moving to other investment vehicles such as ISAs is a stark illustration that the current architecture has lost public confidence."
He raised concerns about the complexity of the pensions system:
"If we are to avoid millions of people facing poverty in old age, then we need to give them an attractive structure to save into, not simply order them to save. A simpler system, a higher state retirement age and a proper savings policy would at least provide the foundations for a new retirement savings architecture. We cannot go on like this, and if nothing is done then people will continue to walk away from pension saving."
The report named 'Roadmap for Retirement Reform' gave three key areas which needed to be addressed in order to provide a more effective pension system for savers.
Firstly, it suggested that the retirement age should be raised to 70, stating that the current provisions are inadequate to support a 'potential 30 year retirement'. The report welcomed the announcement of rise of the State Pension Age to 67 by 2026 however it is described as 'just a start' which Small believed to be 'too slow'.
He proposed that:
"A higher state retirement age will also encourage private saving, for those who wish to "retire" earlier."
In order to simplify the pension systems, the report suggested the introduction of "a flat-rate" and "universal" and current means-tested schemes should be "abolished" in order to provide a fairer scheme for all retirees.
Other suggestions offered by the Institute of Directors included a complete reform of the current retirement funding system and the introduction of a formal UK government savings policy in order to 'encourage long-term, non-pension, saving by employees and employers in partnership'.
The Director General of SAGA, Ros Altmann said:
"People are no longer willing to just put their hard-earned money into a 'locked box' where that money is taken away from them and they cannot access it for potentially a very long time. If government wants to ensure people save for later life, auto-enrolment needs to focus on encouraging long-term savings in general, rather than just pensions in particular."