I’m pleased to see that it will be discussed by a notable panel later today and I hope that a recording of the session will be circulated so that people can digest what is said at leisure.
This report provides a real wake up call on the true level of savings needed for a decent retirement. How can individuals, employers, pension companies and government help bridge the retirement savings gap?
Look forward to the discussion tomorrow. https://t.co/kggkFCPbj5
— Josephine Cumbo (@JosephineCumbo) January 24, 2021
The report itself, sponsored by Aviva, is indeed masterful in analysing the savings shortfall of the UK population, beginning with the impact of auto-enrolment in improving participation in workplace pensions.
What is this report trying to do?
The report sets out to establish a “living pension” as a minimum wage that people can expect in retirement.
A Living Pension would provide the private pension income in
retirement that can facilitate a socially-acceptable adequate
standard of living, taking into account the workings of the tax
and benefit system. It would reflect how future living standards
for pensioners might change relative to working families, as well as how living costs might vary between cohorts of pensioners.
We show that it is feasible to calculate the contributions
required by a low-to-middle income worker to secure an
adequate income in retirement. The parameters chosen for the
Living Pension calculation – and explored in this report – aim to
balance the long-run stability of the calculation with realism and the need to reflect current behaviour.
There are two challenges that jump at you from this and they are not properly addressed by the report
- The vast majority of pension that people get in retirement come from three defined benefits – income from DB occupational pensions, income from the state pension and income from universal and/or pension credit. The report looks at DB pensions in terma of “wealth” and doesn’t look at state benefits at all.
- The report consistently talking of the pot needed to provide the living pension but tells us nothing about how the pot will be converted into income, other than some vague assurance that
The estimated income requirement throughout retirement that
can be calculated from this information, combined with the
assumed use of a drawdown product to access those savings,
allows the calculation of a target ‘Living Pension’ pot.
The second step is to calculate the annual contributions
needed through working life to accumulate this target pot
I sense the report is trying to convince itself , Government and those few pension professionals and policy wonks that actually read these documents, that private DC pensions are fit for the purpose of establishing a living wage in retirement.
While I can see that fulfilling this ambitious conviction would promote Aviva and other DC workplace pension providers , to center stage in future retirement policy,
Dashboards – for the future or today?
There is an assumption throughout the report, that given the information, people will take rational decisions. The report’s conclusion is that people will use the pension dashboard to establish their shortfall in retirement income and do something about it.
The Government is .. introducing legislation which will provide a framework to support the provision of pension dashboards (a digital interface that will allow people to view their different pension pots in one place)
It [the living pensions] could also help individuals, in conjunction with the information provided by pension dashboards, to understand the additional savings they may need(sic) for retirement.
The “living pension” is intended to help the “under-savers”, but decades of shortfall-modelling has failed to excite ordinary people into saving more.
In the late 1990s, I worked with Demos on a project called “reasonable force” which established a minimum living wage for UK pensioners and suggested a level of compulsory contributions needed to ensure nobody was a burden on other in old age. This idea of a state organizing contributions evolved into the auto-enrolment system , the level of required contributions (12% of a band of earnings) and minimum income (£13,000pa) have not changed much from the recommendations of the Resolution Foundation.
All research into dashboard usage points to people wanting to know what is coming to them at retirement and that the three kinds of defined benefits will be as important as “pension pots”. Indeed, if people were to know the conversion rates of “pot” to lifetime income, their view of pension saving might not be as rosy as this report infers.
“Wealth or wage?”
To be fair to David Finch and Cara Pacitti, the report does make it clear that in terms of embedded wealth , a defined benefit takes a lot of beating. Using this methodology, we could impute a value of around £300,000 to the value of the state pension and I suspect that for the poorest in society, the value of the various benefits within pension and universal credit could amount to almost as much again.
In this context, the green boxes in the chart below, would look even less exciting.
Turning wealth into a living pension..
The chart shows the inherent bias in the report to see pensions as wealth, which of course begs the question “how do you turn back the equation?”.
Give most people the choice between £200,000 in an accessible “pension pot” or £5,000pa as a wage for life, most people are proven to prefer the pot
Steelworker wanted £12k from age 60. He would have had £20k guaranteed for life from age 56(!) from BSPS. Adviser didn’t mention that… instead, he recommended the transfer so that the steelworker could access TFC to buy a rental property ‘to secure some retirement income’ 🤬
— Laura Robinson (@L_A_Robinson8) January 22, 2021
Estimating the size of pension pot that can provide a Living Pension
The report focusses heavily on the income needed by different cohorts to support a minimum standard of living in later in life. But the assumption that a pension pot can provide a Living Pension is based on assumptions that I can’t find in any of its 57 pages.
The report focusses entirely on what is needed to go in to workplace pensions and not at all about how the money comes out.
It is as if there are two reports..
The bulk of the report’s 57 pages is taken up with a detailed analysis of people’s capacity to save and their need for a retirement income. This gives rise to the wake up call that the amount we will be getting in retirement is insufficient to meet our spending needs.
The generation we thought would be suffering most from a shortage of retirement income when I worked on the Demos paper “reasonable force” are retiring now. Instead of retiring on private savings, low income people are getting a much better state pension (in real terms) and benefits that we thought then , would have been abolished. Voluntary savings into pensions have fallen since the late 1990s and it is workplace pensions (DC but especially DB) which provide low earners with the top-up.
Reading those sections of the report dealing with workplace pensions, it is as if our dystopian picture of Michael Portillo’s “nugatory” state pension and no further support from the state had happened (or is about to happen).
At the same time, the report makes assumptions that people will accept increases in workplace pension contribution rates and make additional voluntary contributions because they see penury ahead. People are well aware of the inadequacy of their private pension planning and have been for decades. But they have relied on the wealth of the state to pay them (back their tax and NI) and they have relied on reducing costs of housing (as mortgages have been paid off) to ensure they retire in some comfort.
The second report fails as the first succeeds, there is nothing in the “pension” part of this report that gives me comfort that the private sector is capable of paying “living pensions” . On the contrary, the pension part of this report is entirely about “pots” and “wealth”. It’s troubling to me that the insurance sector no longer talks of social insurance, but of wealth accumulation. The second report seems to focus on the needs of the private sector wealth accumulators more than providing the living pension. I suspect that there is a gap between pension providers and policy thinkers and this is where the fault line shows.
Bridging the retirement savings gap?
The question the report asks, which is the “thinking the unthinkable” question Frank Field was asking in 1997, is – “should we transfer reliance on paying pensions for the low and middle earners from the public to the private sector. Put another way, should we be reducing taxes and national insurance and increasing AE contribution rates.
If we want to put our retirement futures in the hands of the private sector, then the private sector is going to have to show us how we turn back the wealth they help us create, into a “living pension”.
Or a bid to de-risk pay as you go?
Having de-risked occupational pensions of future accrual of guaranteed benefits, there are many who want to do the same for PAYG promises to the low and middle earners. In his last quinquennial review of the state pension, then Government Actuary hoped that by 2020 auto-enrolment would be sufficiently advanced that the triple lock could be unwound.
I too would like to see personal savings sufficient for people to have earned their own pension living wage. But we need a reliable and consistent way of turning pots into pensions more than we need to turn off the tap on state benefits in return for lower taxes.
Only when the private sector can show it can turn pots into pensions , can it be entrusted with the money and responsibility to pay us the “living pension”.