Tim Sharp says NEST could kick start much needed innovation in the retirement income market
"Ain't nobody's business", generations of blues singers have crooned, many of them making lifestyle choices that rendered pension provision an irrelevance.
Such a spirit of laissez faire is increasingly affecting pensions policy in the UK.
By rejecting the opportunity to allow state-backed pension provider NEST to bring common sense to the retirement income space, the government has washed its hands of a crucial aspect of our welfare system.
NEST, created to cater to those low and middle income savers the financial services sector finds least attractive, had wanted to develop a retirement income product. An early blueprint suggested a modern mix of drawdown, access to cash and deferred annuities.
Such an approach could have filled the void created when George Osborne was allowed to blow up the discredited annuities market without putting anything in its place.
This latest decision confirms that delivery of a crucial part of our welfare system has been handed over to unguided market forces, with the state taking a back seat.
But it is too important for that.
Who should take control?
The state has an interest in what happens to the tax relief used to support retirement savings.
Ensuring that people have a reasonable standard of living in old age is society's business.
Retirement income decisions are too difficult for people to deal with alone, involving complicated choices such as judgements about likely lifespan, inflation and interest rates and asset allocation.
And it is too important to be handed to the pensions industry alone. It is too distant from the end consumer, focused on its most profitable clients and has constituent members who don't want to be the first mover in an untested market.
A hands-off approach to pensions saving was the hall-mark of UK pensions policy from the 1980s. That took us to a situation where only a minority of private sector workers were enrolled in a pension scheme.
Belatedly, the government introduced automatic enrolment, combining hard compulsion of employers with soft compulsion of individuals topped off with cost and standards control and a state-backed savings provider. Pension provision is turning around.
There are reasons for inaction in developing the retirement income space:
- Most defined contribution pension pots, especially those saved with the likes of NEST, are currently tiny.
- Many of those retiring today may have defined benefit savings as back-up.
- Demand for alternative products is unproven.
- The market may defy its past record and innovate in a timely manner to provide products that work in the interests of low and middle earners.
But weighing against that is a situation where many people faced with a baffling array of choices opt for the path of least resistance. Currently for many this means cashing in their pension.
Figures released with the Budget show that pensions freedom has generated far more tax than anticipated, with savers taking their money over shorter-than-anticipated timeframes.
There isn't yet demand for new-style products offering lifelong income, say providers. But that's what many think they are getting when they purchase a drawdown product, according to analysis by Pensions and Lifetime Savings Association.
So we have a situation where:
- There is a risk that cashing in your pension becomes a cultural norm, leaving savers struggling in later old age.
- Many of those who opt for an alternative, such as drawdown, may be surprised when their money runs out.
- There is certainly no obvious driver for developing - at a fair price - retirement products for low and middle-income savers
- There is no means of nudging savers towards sensible, well-priced retirement income products.
NEST has shaken up the pensions savings space, ensuring that good value, well-researched default products became the norm.
It could have provided the same impetus to the at-retirement market, leading others to innovate.
Ain't nobody's business? Yes, it clearly is.
Tim Sharp is policy officer at the TUC
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