Patrick Heath-Lay: The next few years will determine whether historic successes can be built on.
No matter which party wins on 4 July, they will face the same challenges in the UK pensions system.
True, a lot of progress has been made over the last two decades: there has been the hugely successful roll out of auto-enrolment (AE) to 11 million people and we have seen major changes to the state pension – flat rating remains one of the most consequential reforms since 1948.
On top of that, we have seen significant falls in pensioner poverty since the late 1980s. There's no denying this represents significant progress that should be considered when we look at future challenges.
Four areas for improvement
However, there are still reforms needed and we have settled on four areas where we think that a government of any colour could make an impact and improve outcomes for savers.
First, while it is increasingly clear that AE has largely solved the coverage problem, some serious equality problems remain, like the gender and ethnicity pension gaps, not to mention the fact pension saving has fallen among the self-employed.
Second, while most people who should be saving into a workplace pension are now saving into a workplace pension, policy makers haven't solved the adequacy problem. The average saver is saving roughly half the amount they need in order to hit what the Pension Commission of two decades ago thought would be an adequate income for them.
This debate has stalled and there has been no top-level political support for increasing pension contributions since the late noughties. Of course, it has been hard to argue for higher pension contributions during Covid-19 and the cost-of-living crisis. So, despite the weight of evidence that under-saving is storing up massive problems for the future, we've refrained from arguing for higher contributions and restricted ourselves to growing the evidence base.
The initial step to getting a revised consensus on pension reform is greater clarity about what people should get from both the state pension and workplace pension saving. Currently, the outcome from the combination of statutory minimum contributions, really the modal default contribution rate, and the new state pension is what UK pensions policy implicitly targets. Policy should be much clearer on this and set out what a reasonable income might be for a given individual. Conversations about what the right statutory minimum contribution rate is would then flow from greater clarity over what pension policy is specifically trying to achieve.
Thirdly, we also see pension market reform as central to improving member outcomes. I am an admirer of the Australian approach to gauging the value for money offered by a pension fund. In Australia, returns shown after charges are the core of transparent value for money metrics.
Like many in the sector, including the Pensions and Lifetime Savings Association and Association of British Insurers, we support the introduction of similar metrics in the UK. Currently, these are intended to be of use to pension professionals and focused on workplace schemes. But why stop there? Surely, as in Australia, people should be able to compare all pension provision on a consistent basis? I see consumer facing value for money metrics as focusing competition between all pension providers on things that are fundamental to outcomes for savers. They should be a priority for regulators and should be front and centre on pension dashboards.
Finally, irrespective of who wins the election, we expect to see further efforts to consolidate the pensions market, build scale and encourage domestic investment.
Thought leaders have looked to Canada and Australia and seen how very large, strongly mission oriented pension schemes have grown and diversified how they invest. It's only natural that, over the last five years, there have been many conversations about how to apply the lessons of these experiences in the UK. It's clear from the pessimistic assessments of the IFS during the election that any government will be casting around for capital.
The main difficulty with the debate over how pension funds should invest and how much they should invest in their home geography is the unfinished business. We do not think that the issue of how to align political priorities on investment with the best interests of members has been fully resolved. I can understand the desire of politicians, of many parties to encourage pension schemes to invest in UK infrastructure. In the coming months those running pension schemes will need to work constructively with government. Where pension funds are encouraged to invest domestically, they should be able to achieve a fair risk/return profile for their savers.
Great improvements have already been made to retirement saving in this country – the next few years will determine whether these historic successes can be built on.
Patrick Heath-Lay is chief executive of People's Partnership, provider of The People's Pension
This article comes as part of Professional Pensions' PP Pensions Commission – which is looking to bring together industry opinion and ideas on the future of pensions ahead of the general election on 4 July.
Send your thoughts and ideas to the PP Pensions Commission via email to [email protected]
