The UK has been indicated by Aviva (2011) to be facing a significant change in population with a large number of the older citizens approaching their retirement. The current retirement market is in a downward spiral with its trend of failing today's generation of UK retirees. The trend has been predicted to be on the rise and is noted to have potentially devastating consequences for the retiree's income as well as the general security of the future generation of baby boomers/retirees. In order to illustrate the intensity of the problem, it is worth noting that 385,00 individuals bought annuities last year alone (2010) and the figures indicated that only about 32% of the clients bough annuities from firms that are different to the ones that they saved with. In this paper we critically appraise the validity of the statement "The insurance industry is no longer capable of delivering pension products likely to provide the consumer with a reasonable retirement income" with a discussion of how the need for adequate pension provision may best be met in future.
The need for pension schemes
The age structure of the UK national population has been indicated to be om line with the one for a majority of the Western nations (Leeson,2004,p.7). The 2001 UK census indicated that the percentage of individuals who are over 60 years increased while the one for under 15 years decreased. This trend has had policy makers in Europe to express a lot of concern due to the pressure that this population has on health as well as social care (Richter,1992). Pension Schemes are designed to help aging individuals in having an income even after they quit active working life.
Benefits of Pension Schemes
Prudential (2011) outlined the various benefits that are attributed to being a member of a pension scheme for the sake of retirement.
The very first advantage of joining a pension scheme is tax relief. Whenever an individual joins a pension scheme, they get help from the taxman who helps them by increasing their pension pot through the provision of tax relief. This is however subject to various set limits.
If one has an individual personal pension then their contribution are taxed prior to being placed in their fund.
Benefits of pensions
Prudential (2011) mentioned that there are several benefits of pension systems. They include the following;
According to Prudential (2011) when a person saves in a pension plan, the taxman aids them in increasing their pension pot through the provision of tax relief which is subject to certain specific conditions. If a person has an individual pension plan, then their contributions are already taxed by the prior to being posted to their fund. Any form of basic rate is then subsequently refunded back to their plan by the department of tax.
A tax efficient growth
The money that is in the pension fund is indicated to grow largely without any tax to it (taxation free). This can effectively help in the boosting of the amount that an individual has in their fund. There is however a disadvantage since the value of the fund may fluctuate depending on market conditions.
Contribution by the employer
In case of accompany pension, the employer is responsible for making the contribution to one's pension and thereby increasing the amount of money that goes into the fund. This however depends on the scheme.
An access to funds that are tax free in retirement
Whenever an individual retires, they take benefits with an option of claiming up to 25% of the pension fund that they had built as liquid and tax free cash (Prudential,2011).
Access to investing in the funds
Via the pension savings, one has an option of investing their funds in a diverse range of portfolios like stock markets, funds and commercial property. The scheme determines the range in investments (Blake,2000,p.46).
An overview of the UK Pension system
The National Association of Pension Fund (NAPF) noted the UK is ailing from a crisis in its retirement savings with close to half of all the pensioners being predicted to rely on means tested state benefits by the year 2050.This crisis can be made worse by the reduction in public sector pensions which could lead to an increase in the level of pension poverty as well as a push in the cost of all state benefits (NAPF,2010).
The Local Government pension Scheme (LGPS) is noted to be very different from the other forms of schemes that derive its funding from £122 billion in assets from the very last valuation. Since this form of funding has very important benefits, there is a need for it to be given a different treatment as compared to the other schemes.
The previous reforms that were put in place have not helped the public sector schemes to contain the costs. There is therefore a need for an evidence-based assessment of all the schemes as well as the assessment of if the issues that have been presented in regard to affordability as well as a comparison of the public sector with the private sector. Snapshots of the reliability figure have not been helpful in the measurement of affordability. There is therefore a need of looking at the long-term projections of public sector pension expenditure (NAPF,2010). The sorry state of the UK pension system is causing a storm within the public sector with threats of strikes looming over the same (BBC,2011)
The weaknesses in the UK pension system
Aviva (2011,p.6) indicated that there are several weaknesses that are inherent in the current pension system in the UK. These weaknesses are attributed to a myriad of factors such as the potentially high cost of switching between different pension providers as well as the fact that some of the companies chose to avoid making annuities rates to be publicly available for the sake of comparison. These two main weaknesses have been noted to have played a major role in the contemporary retirement environment in which the process of shopping around for the most suitable deal is not the as smooth as it should be for all the customers.
In the past, several Government initiatives have been conducted with the aim of meeting the current as well as the future retiree needs. An example being the removal of the compulsory age of annuitisation at 75 which ahs given a small number of retirees a freedom to employ their savings as well as assets in their retirement to their best interest (HMRC,2010,p.1). From the month of October,2012 onwards, the UK government introduced an automatic enrollment to the pension schemes. In this paper, we propose the need for transparency in order to make it easy for the customers to easily compare the best rates as well as give them access to the suitable annuity that matches their circumstances.
The proposed solutions
Public publishing of the pension rates
The need for all annuity providers to effectively publish their annuity rates in order to make it easier for pensioners to compare rates is one of the proposed solution to the problem that affects the UK pension industry.
The UK annuity providers are not t the moment required to publicly publish their annuity rates. Certain companies have however taken the initiative to publish them in an effort aimed at marketing their numerous annuity products to the increasingly large number of potential clients.
The customers should be presented with tables that have been compiled by an independent regulator like the Financial Services Authority (FSA), a body which is soon being renamed to Financial Conduct Authority (FCA).These tables should be placed on their website for ease of accessibility and at a low cost.
There is however, a need for the industry to work together with relevant organizations such as FSA/FCA in ensuring that a suitable protocol is developed to be used for allowing the various types of pension annuities to be presented. The government should work in tandem with the industry in developing simple ways of effectively highlighting to the consumers the best rates that may help them in getting better rates when switching between providers.
The inclusion of medical questionnaires in the pension maturity packs in order to drive to the automatic underwriting in the annuities
The UK pension system has been noted to be filled with several cases of impaired or enhanced annuities. These form of annuities rely on medical underwriting in the provision of higher than average income to individuals with various conditions or lifestyles that are most likely to interfere with their life expectancy. The Association of British Insurers conducted a study on the purchasing behavior of annuities and the report indicated that 51% of the uindividuals surveyed had heard of the enhanced annuities even though a mere 10% accounted for the total purchases (Crouch, Spatham & Barks,2010,p.40). There is therefore a large number of pensioners who fail to…