The United Kingdom has changed beyond measure since the Turner Commission’s seminal review 20 years ago, with a dismal pensions future for millions now just over the horizon.
Our industry and parliament have not yet grasped this prickly nettle. Award winning journalist Stephanie Hawthorne asks if a new review by the IFS, led by the ‘great and the good' of the industry, will mark a new turning point?
After a fanfare of publicity earlier this year a major pensions review is in progress, with a stellar steering committee, including Joanne Segars, Alistair Darling and David Gauke. They are quietly getting on with things behind the scenes but progress appears to be more ‘jog than sprint'.
The Pensions Review, led by the Institute for Fiscal Studies (IFS), in partnership with abrdn Financial Fairness Trust is a 2.5-year project. Led by three IFS directors - Jonathan Cribb, Paul Johnson and Carl Emmerson - who told Professional Pensions: "Our first main report will be out in the Autumn and will focus on the state pension. IFS researchers have also started work on the accumulation strand. In addition, the abrdn Financial Fairness Trust have commissioned some polling - the results of which will be published in the summer, and also some public engagement work on which we will draw".
The rationale for a review
The IFS says, while some aspects of pensions are looking positive, the rationale for the review is clear. It notes: "The average income of pensioners has been similar to that for those under state pension age. Pensioner poverty rates are lower than the population average. And more employees are saving into workplace pensions than ever before. These are all big policy successes. But the future looks risky at best for many current workers hoping for a comfortable retirement."
Pensions Review steering group member and chair of the abrdn Financial Fairness Trust Alistair Darling echoes this sentiment: "Too many are saving too little for retirement. Many self-employed and those in insecure work don't have a pension. Increasing numbers are living in the private rented sector, which will lead to higher housing costs in later life"
"Many pensioners are doing well on average and pensioner poverty has been cut drastically, but there is a danger of a "a future where too many won't have enough to live on in their old age," Darling warns.
An IFS pensions review statement at the time of the project's launch also sets the scene. It says: "The last 20 years have seen the continued decline of salary-linked defined benefit (DB) pensions in the private sector, the abolition of state earnings-related pensions, low interest rates, falling homeownership, low typical contributions to defined contribution schemes, and a collapse in pension saving among the self-employed. The introduction of pension freedoms has given people flexibility but means there is no longer the same degree of longevity-risk-sharing that DB pensions and annuities provide."
Major IFS concerns
The IFS's main concerns include:
- Some 60% of middle-earning private sector employees who are contributing to a pension are saving less than 8% of their earnings. Nearly 90% of them are saving less than the roughly 15% of earnings that Lord Turner's Pensions Commission thought more appropriate. It says almost all of this saving is in defined contribution (DC) plans with a greater burden for members than traditional DB schemes.
- Fewer than one-in-five of the growing number of self-employed workers are saving in a pension. This compares with around a third when the Turner Pensions Commission reported.
- At age 65, only 3-4% of those born in the 1930s and 1940s lived in private rented housing, compared with 6% for those born in the 1950s and with what looks likely to be 10% for those born in the 1960s.This percentage could be even higher for younger generations, leading to a combination of a low standard of living in retirement and/or greater reliance on housing benefit.
- Higher state pension ages are a coherent response to increased longevity but they pose difficulties for many while longevity improvements have been smaller than predicted a decade ago. The more the state pension age rises, the harder it will be for people to remain in paid work until that age. Among those with low levels of formal education, 43% of men and 46% of women in their late 60s are disabled. A higher state pension age pushes up income poverty rates of those in their 60s - with the latest increase, from 65 to 66, led to the income poverty rate of 65-year-olds more than doubling.
- The demographic and other pressures on the public finances are already considerable. Some 24% of adults are currently over the state pension age. This is projected to rise to 27% by 2050 and 30% by 2070. This puts substantial pressure on public finances. The Office for Budget Responsibility projects state pension and pensioner benefit spending to rise from 5.6% to 9.6% of national income by the early 2070s; (equivalent to £100bn a year in today's terms). The pressures facing the public finances due to health spending are even larger.
- DC pensioners risk running out of private resources or of being so cautious that they lead a needlessly austere retirement. While pension freedoms allow people to take control of their own finances, even for the most numerate the decisions on how to draw their pension wealth over a lifetime of uncertain duration are difficult.
Most pension experts agree on the need for more reform. Irwin Mitchell solicitor Michael White stresses: "The time is absolutely right for a review of pensions policy. There are a raft of significant problems on the horizon which need to be addressed, the greatest of which is the timebomb of an ever-increasing population of pensioners and insufficient retirement savings."
Cartwright director of investment consulting Sam Roberts puts it more bluntly: "For the majority of people, it is as though they are walking up a down escalator and going backwards financially no matter what they do. Even an inflation-linked annuity is buying less real stuff each year due to technicalities in how price inflation is calculated."
The most pressing pension reforms
Obviously, the IFS can't aim for utopia but here are a few pointers from experts on the bare essentials they would like to see in the IFS final recommendations.
- Extension of AE provision and adequacy (including both eligibility and contribution levels) as soon as economic conditions allow.
- Consider allowing long-term savings to be used more flexibly when and where needed.
- Put in place a new funding code that delivers for all stakeholders - providing strong reassurance to members and trustees and clarity to sponsors on costs.
- Simplification where practical.
- Make financial education part of the primary school curriculum to improve life chances of children, their families and the wider community. "Teaching primary school children about the benefits of saving, financial risk, debt, scams and being rewarded for working hard have the potential to be transformational.," says ICAS head of charities and reporting Christine Scott.
- Encourage innovation on products and services for savers such as CDC schemes to generate an income from DC savings, better Superfunds and other funding solutions for DB schemes on route to the endgame.
- Expand tax relief beyond 1% on employer contributions for people earning under £10,000 - or even more ambitiously - £18,000.
- Get on this with pensions dashboard.
- Clarify the core state pension. Dovetail it with disability and later life targeted means tested support for those in need. "Providing larger and larger state pensions for those with defined benefit pensions is not fair and will lead to draconian actions - including further increases in state pension age which harm those in manual and physically demanding jobs," says Broadstone head of policy David Brooks.
There were a few reforms Mercer partner Tess Page thought could wait a while (or never!)
- Extension of TCFD climate reporting to smaller schemes
- Any further meddling on directing pension schemes where to invest (e.g., seeking to push DC schemes into illiquid assets or giving a bias to UK investments - no scheme should be "forced" into these investment routes
Sources: ICAS' Christine Scott, Mercer's Tess Page, Irwin Mitchell's Michael White and Broadstone's David Brooks.
The world is your oyster
Despite the world-beating expertise of the City of London on the doorstep, the UK barely scrapes into the top quartile of pension provision in Mercer's latest world rankings of pension systems - indeed, the UK is only 10th out of 44. Mercer's Tess Page interprets this as "a "could try harder" rating!
Page recommends the IFS takes a leaf from the bullet point suggestions which were included alongside the UK's entry in the rankings. These would, she concludes, be "a great start".
Be careful what you wish for. It is never too late to find ways to drive improvements, but Page warns "there is A LOT happening in pensions".
She believes: "There is a danger that a well-intentioned 'drains up' review either gets lost in the noise, or adds further to the noise and creates confusion for trustees, corporates, and policymakers."
Cartwright's Sam Roberts agrees: "The pensions and savings industry is in such a poor and complex state because of repeated top-down government interference over many decades - I'm sure we can all think of many examples!"
His main concern is "that the industry will be asked to implement a range of top-down patches which may sound good at first glance but add cost and complexity and therefore probably make it worse for the average person in terms of their retirement outcomes".
Yet despite a certain amount of cynicism from these old hands, Brooks supports the need for reform: "We are in a false phase where many retirees still have DB pensions and DC savings can be used to provide the lumpy income enjoyed in early years of retirement. The issue will be in 10 or 20 years' time when the DB savings have all been crystallised and people with only DC will be facing some difficult life choices. Freedom and choice is only so good if the choices are clear and understandable, but as people are often confused by pensions this creates a massive risk."
In the author's view, doing nothing is not an option. Without action today, the future will be worse than the present Do we want such a dismal outcome for our younger colleagues, our families and our children?
Stephanie Hawthorne is a freelance journalist and was editor of Pensions World between 1989 and 2017