The table below shows how we get income in retirement. There are two standout numbers, the importance of state pensions and benefits that makes for 43% of income we receive and the tiny proportion (4%) that comes from personal pensions. Based on outcomes, the insurance industry is generating a tiny proportion of our national income in retirement and it is national insurance and not salary that is the greatest contributor to retirement security.
If you want to read the full report from the DWP (which has been out some time but seldom remarked up you can find it here https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181330/pi_series_1011.pdf
So what’s the big deal?
One of the impacts of the new workplace pensions into which 11.5m new savers will be enrolled, will be to reverse the percentages of income derived from occupational (DB) pensions and increase the amounts arising from personal (DC) pensions. Now I know this is a crude summary and a lot of occupational pensions are DC (including the new mastertrusts like NEST and NOW), but the big issue is in this shift.
Until now, in policy terms, the efficiency of personal pensions doesn’t matter. If an efficient personal pension system bumped up its importance from 4% to 5%, so what? In macro-economic terms that doesn’t amount to a row of beans. But if you were to increase the 26% arising from occupational schemes to 33% as a result of greater efficiencies – you’d be talking!
There is not much that can be done to make DB schemes more efficient but there is a lot that can be done to improve the efficiency of DC. Which is why anything that the DWP comes up with to out hidden charges (and thereby reduced them) is good news. It’s why (and this is a lot more important), moving to the DB method of paying pensions (rather than individual annuitisation) is so critical.
Millions of people have suffered impaired retirement incomes as a result of high charges and poor decumulation on personal pensions and millions more are still to do so (unless the ABI gets insurers to create a charges amnesty on its back bock- thinks unlikely!)
But for the future generations of DC savers, a system of personal pension saving which is more open, more trusted and –yes – more efficient, is not only a moral imperative, it’s a political imperative too.
And why this matters to you!
While I’m in a statistical frame of mind, here are relatively new statistics from the Office of National statistics http://www.ons.gov.uk/ons/dcp29904_256641.pdf
They reveal that that people are working longer than they used to. The average age at which people leave the labour market – a proxy for average age of retirement – rose from 63.8 years to 64.6 years for men and from 61.2 years to 62.3 years for women between 2004 and 2010.
This average summarises information about the ages at which people stop working, which differ for different people. For men, the peak ages for leaving the labour market are 64 to 66 years. For women, the peak ages are 59 to 62 years. Thus, retirement peaks around State Pension Age (SPA) for both sexes; but many people retire before SPA, and others work beyond SPA.
You want to retire when it suits you- you make sure your pension schemes are working for you, and not for the financial services industry!
ADDENDUM
Here’s what the House got!
Written Ministerial Statement
Monday 24 February 2014
THE DEPARTMENT FOR WORK AND PENSIONS
Pensions
The Minister for Pensions (Steve Webb MP):
I am pleased to announce the
Government will be introducing new measures to require transparency for transaction
charges in pension schemes. Later today we intend to table an amendment to the
Pensions Bill 2013 to introduce this latest step in the Government’s wider plans to
ensure consumers receive value for money from their pension savings.
Transparency of costs and charges is fundamental for good scheme governance and to
enabling comparison between schemes. Our amendment, which is intended for
debate at the Report Stage of the Pensions Bill 2013 in the House of Lords this
Wednesday, will place a duty on the Secretary of State to make regulations requiring
greater transparency around the transaction costs incurred by work-based defined
contribution schemes.
Requiring increased transparency is the latest step in the wider Government
programme to see fair charges for people who are automatically enrolled into
workplace pensions. Last year, we consulted on whether to cap charges in the default
funds of schemes used for automatic enrolment, and the Government remains
committed to seeing this policy through during the life of this Parliament.
Accordingly, our response to the consultation on charges, and further proposals on
quality and transparency in workplace pension schemes, will be published soon.
This article first appeared on www.henrytapper.com/topthinking
Henry
Those ONS retirement age stats are a little stale they cease in 2010 – there is more recent evidence that the trend to an increasing retirement age is continuing..
You say that there isn’t much we can do about the efficiency of DB and there you could not be more wrong. We could move away from the funded DB entirely and adopt the insured book-reserve of Sweden and Germany – that eliminates all of the costs problems of funding schemes and provides incentives for employers to offer DB because they get the use of the contributions until pensions are paid. Funded occupational DB operates at about 50% of the efficiency of insured book reserve occupational DB.
Con
Oh alright Con- it’s a fair cop!
Interesting post as ever Henry. There is a more current version of the DWP report – the 2011/12 report is accessible at the link below. Your 4% and 43% numbers still stand though. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/211685/pi-series-1112.pdf
Thanks Stuart – I will try and find it