Many workers cannot afford to retire, actuaries warn

Many workers may discover that they cannot afford to retire, a firm of actuaries has warned.

The firm, LCP, says this is because the decline of final-salary pension schemes is likely to continue.

Its report also says UK employers will save £73bn as a result of some adopting the consumer prices index (CPI) rather than the retail prices index (RPI) to protect pensions from inflation

But this will solely benefit employers rather than their staff, LCP says.


LCP's report, an annual review of the financial position of the pension schemes of the FTSE 100 companies, is gloomy about the future.

It points out that very few big employers now offer a traditional final-salary pension scheme for new recruits. Increasing numbers have been shutting them even to current staff.

The actuaries predict that the trend will continue.

"From 2012, as companies face the cost and administrative complexity of auto‑enrolment, further downgrading of existing schemes is likely," LCP says.

"In the short term, this may help the companies' finances but, in the longer term, many people could find that they simply cannot afford to retire."

Auto-enrolment is the impending requirement for all but the smallest employers to provide their staff with a pension scheme, or to enrol them in the government's own forthcoming top-up pension scheme called NEST.

Big savings

LCP describes the past year as "benign" for most schemes.

In the 12 months to the end of June 2011, the combined deficit of the pensions schemes of FTSE 100 companies fell, from £51bn a year ago to £19bn.

The report highlights the beneficial effect for employers of being able, in some cases, to adopt the slower moving CPI, rather than the traditional RPI measure, for inflation proofing.

The move was prompted by a change in government policy towards public sector pension schemes in July 2010.

Not all companies have disclosed if their pension rules allow them to make a similar change as well, but where it has taken place there has been a dramatic windfall for employers.

In the past year, BT has saved £3.5bn, BA £770m, BAE Systems £348m and Tesco £270m, LCP said.

"Of course, where companies are seeing a significant reduction in their obligations to current and former employees, pension scheme members are losing out through lower expected future benefits," LCP points out.

"If CPI were to average 0.75% per annum (pa) less than RPI, a pensioner retiring at age 60 on £10,000 pa would see their benefit eroded by nearly £1,200 pa in today's terms by the time they reach age 75.

"The difference is even greater for a deferred pensioner whose pension has yet to come into payment; a 45 year old expecting RPI linkage up to retirement and in payment could lose around a quarter of the value of their pension," the report adds.

'Small print lottery'

So far, only 20 of the top 100 companies have disclosed that they have been able to adopt such a change for their schemes, though more are expected to do so in the course of this financial year.

Not all will be able to adopt CPI in any case, as it will depend entirely on the precise wording of their own pension schemes' rules, which may have been written decades ago.

LCP describes this as a "small print lottery" but one which will have huge long-term impact for some employees.

"The most common impact has been for pension increases in payment to be unaffected but for deferred pension revaluation to move to a CPI base," the report says.

"In its revised July 2011 impact assessment, the government has estimated that, across all UK pension schemes, the change to CPI will reduce the current value of members' benefits by £73bn."