Compulsion sometimes the best medicine

Politicians in Britain believe taking radical steps to deal with the pension shortfall would be electoral suicide. The idea people should take personal responsibility for their retirement income even seems unreasonable to some. But is it? It’s been done elsewhere. 

Another day and another survey claiming people don’t want to retire at 60 or 65 because they ‘don’t feel ready to stop working yet’ or have a ‘fresh attitude towards retirement’.

This kind of research is inherently suspect.

Yes, there will always be some who find the mental stimulation of remaining in the workplace outweighs the prospect of enforced idleness.

Suggestions 70 “is the new 60” or that an entire generation has just decided it wants to remain in a job to keep active is to ignore the wider problem of the pensions crisis.

The MGM Advantage Annuity Index in late 2012 showed that annuity rates have fallen by more than 20% in less than four years.

Many people cannot afford to retire because the annuity policies they must buy with their pension pot offer greatly diminished returns; others because the pensions to which they’ve contributed for years have been undermined by employers, and, in some cases, people have simply made inadequate pension provision: it is not yet compulsory to save for retirement in the UK.

There’s a great deal of debate as to how to solve the pensions crisis.  But talk of obliging people to take out pensions remains just that – talk.

Politicians hold off from being radical. They know it’s not a vote winner. They think some people see the idea of taking personal responsibility for their retirement income as unreasonable. But is it? It’s not seen that way everywhere else.

Take Switzerland. Its three-pillar scheme is intended to provide security in old age for those who retire after a long career in work.

The first pillar, is a state-run insurance scheme – compulsory for all whether employed, unemployed or self-employed. Contributions are made from salaries and the pension amount is worked out on the basis of average earnings and the number of years over which contributions are made.

The second pillar comprises occupational pension plans – company pension funds in effect. Taken with the second pillar, they’re intended to cover 60% of a person’s final salary. Contributions to the second tier are also compulsory.

There’s a third pillar, which comprises private savings made in addition to the first two pillars – this is not obligatory but many Swiss pay into it because it subsidises pension savings through tax incentives.

The Swiss say that salary deductions mean they’re aware of the high cost of making these compulsory payments but the alternative, a poorly funded retirement with people relying on the state for income, is deemed unacceptable.

It’s a different perspective but one that’s come about through the principle that individuals must take personal responsibility for arranging their retirement income. Time will tell if such a principle takes root elsewhere in the Western World. The omens aren’t great.