The government has made the most far-reaching changes to the pensions system in a generation. The intention is to liberalise the system by giving savers greater control over how their pension pots are invested. The changes, announced by George Osborne last year, are eye-catching—and despite some potential unintended consequences, necessary.

Britain’s pensions system is at risk of being overtaken by demographic change. One of the greatest achievements of the last century has been the lengthening of the human lifespan. Improvements in healthcare, diet and sanitation have brought about a spectacular increase in longevity: in 1910, male life expectancy was below 50. (The Old Age Pensions Act of 1908 set the retirement age at 70). But now British men and women live long past the current retirement age of 65—currently the average male lifespan is 79, and the female 83.

Longer lives have complicating effects. Men and women in retirement need an income and the enormity of the change in lifespan means that now there are more retirees than ever before. The census of 2011 found that there were 9.2m people in Britain over the age of 65, a number that had increased by 10 per cent in the preceding decade; and almost all of them need pensions.

It is a cruel coincidence that economic conditions are now so unfavourable for retirees, just as their numbers are swelling. In an effort to stimulate growth after the crash, interest rates in the United States, Europe and Britain were cut to zero, and stayed there. These low rates have made many investment and retirement products, especially annuities, extremely unattractive to retirees. Annuities are sold by insurance companies, and drip-feed the holder with a level of income determined in part by interest rates. With rates at zero, the returns from annuities are measly.

The twin challenges of an ageing population and low interest rates are especially problematic, as the Japanese example since the 1990s has shown. The effect in Japan was to create a demographic and economic trap, in which the number of economically inactive people rose faster than those who were economically active. When the workforce constricts as a proportion of the population, it exerts a strong drag on economic growth because fewer people are contributing to economic output. As the Japanese experience has shown, this can be a very tough trap to escape. It is crucial that Britain avoids the same fate and the reforms to the pensions system are crucial for ensuring that pensioners are well financed in retirement. But how willing are savers to take advantage of the new rules?

As Andy Davis points out in the overview, very few people have been willing to do so, and Andrew Warwick-Thompson suggest that there is a risk that retirees will make poor investment decisions. The new Pensions Minister makes clear that the government is committed to providing good advice for pensioners, but as Merryn Somerset Webb says getting a decent deal in the pensions market is not easy.

It is to be hoped that savers will not be discouraged. It is crucial that these reforms, along with the government’s auto-enrolment pensions scheme, help more people save more money for their retirement. If not, the trap awaits. Jay Elwes, Deputy Editor, Prospect

Contents

Unfinished revolution Do we want freedom?Andy Davis, Prospect’s investment columnist

Easy prey? Beware the scammersAndrew Warwick-Thompson, of The Pensions Regulator

The new retirement We need to rename itPaul Feeney, CEO, Old Mutual Wealth

Halt the decline in savings Saving must become the normRos Altmann, Minister of State for Pensions

Cutting public sector pensions Should the government do it?Paul Johnson, Director, the Institute for Fiscal Studies

Annuities—who wants them? The most resented productMerryn Somerset Webb, Editor-in-Chief, MoneyWeek