Natasha Browne looks at the arguments for, and against, a new Pensions Commission to tackle policy instability
- The UK retirement market is facing economic and demographic headwinds
- Industry figures argue a commission would restore consensus to pensions
- The pensions minister raises concern it would waste valuable time
It is ten years since the Turner Commission published its concluding recommendations for the development of the UK pensions system. But pressure is mounting for another commission to be established with the aim of encouraging policy stability. This is particularly relevant given the raft of reforms unleashed in last year's Budget.
The National Association of Pension Funds (NAPF) floated its proposals for a Retirement Savings Commission at its annual conference last October. Chief executive Joanne Segars said it would ensure that the long-term interests of savers, and not the short-term interests of politicians, were at the heart of pensions policy.
This week the International Longevity Centre (ILC-UK) weighed into the debate with its report Consensus revisited: the case for a new Pensions Commission. Senior research fellow Ben Franklin argued a commission was "urgently needed" to examine the issue of inadequate retirement income. He warned that a "perfect storm" of economic and demographic trends would leave many with insufficient funds in retirement.
Speaking at the launch of the report, Franklin said one of the most important issues was the new macroeconomic environment. "It is far different from where the Pensions Commission sat ten years ago," he said. Low interest rates and gilt yields were a significant feature of this, as well as potentially low investment returns over the next decade or two. "How can we induce savings in that environment?" Franklin asked. Another factor was stagnant growth in real incomes.
Restrictions on saving
As the report observed, the economic recovery is founded on rising household spending. But the absence of rising incomes would see savings fall, and consequentially, indebtedness would rise. Estimates from the Office for Budget Responsibility (OBR) suggest household debt to income will outpace its pre-crisis peak in 2018, with the savings ratio hitting a ten-year trough.
All of this would place a strain on the amount people could put into a pensions pot. Yet figures from the Pensions Policy Institute (PPI) already show that only half of people on medium incomes are likely to get an adequate replacement ratio when they retire. Franklin said: "That's one in two people who won't be able to afford an adequate income unless, of course, contribution rates rise going forwards.
"This is another problem that hopefully a future Pensions Commission could look at. But raising contribution rates is likely to be difficult in the current economic environment."
There is currently no consensus, stability or sense of direction around how contributions would be uprated, according to NAPF director of external affairs Graham Vidler.
A such, key functions of the commission would include defining target outcomes for retirement savings and extending working lives, as well as monitoring progress against these targets. It would also consult on new policy ideas, but would only conduct one-off reviews to protect pensions from too much tinkering.
Franklin said: "Retirement planning is difficult at the best of times but with numerous moving parts - so many variables to consider – it's been made more complicated. Savers are facing constant change in many policy areas and some are potentially not compatible with others.
"We've also had this perfect storm of falling real incomes, low investment returns and rising life expectancy which is making saving for the future more important but more difficult and more challenging than ever. So we think a new Pensions Commission is needed to rebuild consensus and take a holistic approach to the new world that we're living in."
Pensions minister Steve Webb rejected these arguments. He said commissions were not always "a sure fire success" and were open to failure, although the NAPF's Vidler said that was no reason to avoid exploring a path "to better, more stable policy-making". Webb was also concerned that a commission would dilute policy initiatives in order to get consensus, and that bold decisions were often required to get things done.
"There is a risk in trying to fix things by commission. They can potentially take years, and at the end of it, we might actually have lost time when we could be achieving something. I agree with Ben that this is absolutely urgent," he said.
At the core of the minister's reasoning was the risk that a commission would take too long to effect change. One of the lessons he has learnt during his time in government is that it takes a long time to change anything. Even after setting a policy and getting primary legislation through parliament, there are still statutory instruments, regulations and secondary legislation which need to be processed. These all require separate consultations, slowing the speed at which policies can become reality.
Webb explained: "Say you conclude that automatic escalation of contributions in auto-enrolment is the next step forward – say you took all those years to conclude that – you wouldn't do anything about it until 2020 in reality. Maybe 2019 if you really put a spurt on it. So we've lost four years. It's more urgent than that.
"In a way, what I think this report does is it brings together some analysis that says we've got a real problem, and actually the background could get worse, and concludes a process that is the opposite of urgent. I just wonder about that."
Differing political philosophies were also a barrier to consensus, according to the minister. He pointed out that people were generally either paternalistic, like Labour, or libertarian, like the coalition. Webb said: "If you can finesse it, you can make the liberal bit a bit more paternalistic, or the paternalistic part a bit more liberal but ultimately, you've got to decide where you stand.
"The bits where there isn't consensus are probably areas which are much more about political values, political philosophy, and actually getting a group of good people together doesn't resolve those tensions."
He concluded: "My plea would be not to think this is some kind of panacea that this is going to fix things; it could actually be worse than a consensual well-informed successor of mine taking forward the next stages of reform."
The ILC says the Commission should:
- Be set up with cross-party support.
- Place a central focus on ensuring adequate retirement incomes for the long term.
- Specifically focus on:
2. developing a mechanism to regularly monitor progress against these targets.
3. consulting and ultimately deciding on whether new policy reforms are needed.
- The commission should seek to set out the rights and responsibilities of individuals, employers and government with respect to long-term retirement income adequacy.
- Report to the Secretary of State for Work and Pensions, the Chancellor of the Exchequer and the Prime Minister.
- Be headed by a group of four experts from; academia, charity sector, industry and employees.
Source: The ILC’s Consensus revisited: the case for a new Pensions Commission report
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