In the first of her regular series looking at issues affecting retirement income, Jenny Lowe observes politicians’ inability to focus on long-term issues

Pensions and politics make uncomfortable bedfellows. Over the decades, successive governments have introduced new legislative ideas – always with the best of intentions, but rarely with the best of results.

For example, at the beginning of the 21st century, an employee in the UK can expect to work for around 40 years, and could probably save enough to provide a decent income in retirement over that time, if they approach it properly. Politicians, on the other hand, take a very short-term view, their main objective being to win elections. This tends to limit their pension-planning horizon to a mere four or five years.

A recent survey carried out by financial research company, Defaqto, reveals that two-thirds of us don’t trust any political party to sort out the pension crisis currently facing the UK. Not surprisingly, the Labour Party has seen the biggest drop in perceived trust, falling from 25 per cent in 2007 to 14 per cent in 2008. But don’t take this as a sign that other parties have gained in any way from Labour’s slide in confidence – more people trust no one at all.

All change

Politicians on all sides are waking up to the fact that the UK’s creaking pension system needs fundamental reform, but with each new government comes another complicated layer of regulation. A century ago, when the state pension was introduced, few people lived long enough to collect it. On average men survived only to the age of 49 and women to 53. Today, one in four babies is expected to grow up and live to 100.

Obviously this is good news, but it does mean that in order to enjoy those golden years, we will have to either spend more of the preceding ones in employment or plough more of our cash into pension schemes – or, of course, a combination of the two.

When Gordon Brown became chancellor in 1997, he pledged to change pensions for the better and improve the current system. And Labour has delivered – up to a point.

Small beginnings

In 2001, employers with five or more staff had to start providing access to a stakeholder pension (a tightly regulated and relatively low-cost personal pension plan). Employer contributions were voluntary, but they had to pass any contributions employees wanted to make from their salary on to the stakeholder pension provider. If all the eligible staff at the 350,000 employers affected by this policy had signed up to join the stakeholder pensions on offer, then everything would be comparatively rosy.

In practice, however, the vast majority of eligible staff have not joined these schemes and these days, the pensions regulator doesn’t even appear to be actively checking to see if companies have designated a stakeholder pension scheme in line with the law.

Surely, if the main problem with stakeholder pensions has been the lack of compulsory contributions, then the best solution would be to introduce these. Instead, ministers have opted to introduce a wholly new system.

Getting personal

2012 will see the introduction of personal accounts, designed to simplify pensions and encourage more people to save for the long term. The proposed scheme will see those aged between 22 and state retirement age who are earning between £5,000 and £33,540 a year automatically enrolled into personal accounts, unless they can join a suitable alternative work-based pension scheme.

As with other pension products, savers using personal accounts will be able to take up to 25 per cent of their fund as a tax-free lump sum and then use the remainder to buy an annuity, which will then provide them with an income throughout their retired years.

It is concerning though that we will have taken until 2012 to reach the point that we could have reached on the introduction of stakeholder pensions in 2001.