The freedom and choice agenda has shaken up pensions but there are concerns it is increasing inequality. Michael Klimes finds out why
- UK pensions system does not cater for women, the self-employed or low paid
- Automatic-enrolment and NEST are blunting inequality
- More radical solutions are needed to increase fairness
Everyone can agree Chancellor George Osborne's pension reforms have been radical. But there is sharp disagreement about whether the freedom and choice agenda worsens inequality.
A panel discussed this sensitive topic at Workplace Pensions Live 2016 in Birmingham on 11 May. The panel consisted of the Financial Inclusion Centre co-founder and director Mick McAteer; Association of Consulting Actuaries (ACA) chairman David Fairs (pictured above) and Pensions Policy Institute (PPI) director Chris Curry.
The two most egalitarian policies of recent years have been the introduction of the single rate state pension and auto-enrolment (AE) according to Curry. "The new state pension has the idea of making the pensions system much more equal between men and women, across different ethnic groups and anyone really," he said.
"We [at PPI] think it is likely to achieve some of that. So going forward it is much more likely men and women are going to have much more equal state pension outcomes for example."
While more than six million people have started saving into a workplace pension since AE began, the story of AE is not over. "There is less of a success story here so far in terms of how it affects individuals. What is potentially less well known is the six million people who have not qualified for AE for various reasons," Curry continued.
Groups of people who are not captured by AE are those too young, too old and the vast majority who do not earn enough to qualify. Similarly there are other groups of people such as the self-employed "who could benefit from AE if some of the rules were changed," Curry added.
Apart from the self-employed, women and the low paid are the other two groups of people who need to be helped. What could be done to help them?
McAteer launched a broadside against the general unfairness of the system in the UK which will be worsened by freedom and choice. "What is going to happen as a result of the annuity reforms and LISA is the pensions system will become even less fair. We already have a very big problem in that less than one in five are currently contributing to a pension," he said.
"It is even worse if you are a woman. We also find the UK pension system is skewed to the top decile [in terms of tax relief]. The new pension reforms are just going to exacerbate this stuff I am afraid."
The introduction of AE and the establishment of National Employment Savings Trust (NEST) are not enough to stem the tide, McAteer argued. Instead a much more comprehensive approach is needed which redirects tax relief from the highest to the lowest earners. "Until we redesign the pension system to redistribute resources towards the lower paid and until it is more flexible and more efficient to meet the needs of people on lower incomes; then we are going to embed and keep this unfairness within the pensions system," he said.
The ACA has a less radical solution which revolves around increasing the amount of people enrolled in AE and how much they contribute. "Our suggestion is instead of having a lower earnings deductible; it is completely removed so every single pound of earnings counts towards AE purposes. This enables you to reduce the threshold from £10,000 [the rough figure when people are enrolled] to £5,000 or £6,000," said Fairs.
Those who are excluded from AE including women and people with dual jobs would be the main beneficiaries from such a change. Another element is boosting the maximum contribution rate from of 8% to 16% over time. "So those two facets, getting all people in and those contribution rates up [is critical]," Fairs added.
Ultimately any view of whether the freedom agenda is a positive or negative and whether it increases inequality seems to come down to philosophy. McAteer said: "It all depends on what you believe. I believe those things [pensions, NHS, public services] are too important to be left to the market and those are matters of public policy. So in those terms our pensions system has never been fair. The recent reforms and changes in the labour market are even going to make the market more unfair. It all depends on where you stand."
Five ways to measure fairness in pensions
The Financial Inclusion Centre has five objectives it uses to judge whether a pensions system is equitable:
1) The maximum number of people should be able to get a decent amount of income in retirement
2) Those incomes must be sustainable so people do not fall into poverty
3) People should not be exposed to undue risks
4) Any pension scheme should be as efficient as possible
5) The pension system should be as fair as possible across the board
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