The OECD double our pension expectations – we all need to read the small print!


An introduction to Welsh prophets

Back in 2015, I wrote a blot entitled private savings to rescue public finances

The year before, the Government actuary- then Trevor Llanwarne had prophesied that by 2020, auto-enrolment would be making an appreciable contribution to our later life finances

According to the Government Actuary’s Quinquennial Review of the National Insurance Fund’s finances in 2014, the state pension should be looked at in a framework that included auto-enrolment , CDC (defined ambition) and the pension freedoms (budget changes announced four months before this statement)

I wrote then that at a macro level,  auto-enrolment might now be considered a bale out for the national insurance fund and be thought as  a part of the state pension framework, allowing Government to “phase-out” increases in the State Pension. In the light of what has happened in 2021 to the triple lock, this was not as far-fetched as it sounded .

Welsh prophets are legendary in more ways than one!

Have the OECD fulfilled Llanwarne’s prediction?

Roll forward six years and the OECD produce the 2021 edition of their Pensions at a Glance series . It now considers the UK pension framework as a combination of the State Pension and the auto-enrolment “pension”, meaning that we are replacing 58% of earnings rather than the 28% in the 2019 analysis.

This blog warns against over-reliance on this rosier view of the future, especially if it allows the UK Government to back-track on promised increases to auto-enrolment contribution rates.

Over to David Robbins, one of our most expert commentators who produced a thread on twitter which highlighted both the OECD’s findings , and the sensitivity of the assumptions that the OECD had made.


If you want to read this straight from the OECD’s report, here is the critical section


Auto‑enrolment in occupational pensions in the United Kingdom

In the United Kingdom, the coverage of private‑sector employees by occupational pensions increased gradually from about 40% in 2012 to 88% in 2019 (DWP, 2020[30]), following the implementation of the auto‑enrolment, with the government established NEST scheme being the largest provider. In the public sector, the coverage by occupational pensions is even higher at 94%. However, the coverage among the self-employed decreased from 20% in 2012 to 16% in 2020. Thus, as the coverage exceeds the 85% threshold used by the OECD to qualify for quasi-mandatory , the occupational pension scheme is now considered quasi-mandatory for future retirees in theUnited Kingdom as in Denmark, the Netherlands, Norway, and Sweden.

Minimum contribution rates have also increased. They started from 3% in 2012 and gradually increased to 8% in 2019, of which employers pay a 3% rate. Occupational schemes for new entrants are defined contribution, and the 8% contribution rate will add 27.4 points to the replacement rate of 21.6% from the basic pension for a person with a full career from age 22 in 2020 until the future normal retirement age of 67, earning the average wage and contributing throughout career. Hence, future pension adequacy will substantially improve

As David Robbins notes, the projection of a 58% replacement ratio is based on earnings growing at 1.25% and investments growing at 3% above inflation and are “highly sensitive” to these assumptions. The message is clear – caution needs to be applied!

Another expert on these things , Andrew Young  – tweeting as   @glesgabrighton,  picks up on an error in the OECD’s analysis.

It’s important that we are cautious about the OECD’s rather optamistic projections. I would add to that caution on two further counts

The OECD quote roll up of the auto-enrolment pot gross of charges and then knock off 10% for costs and charges. The impact of a 0.75% charge on a lifetime of saving is generally thought to be around 20% of the fund , so this assumes an optamistic view of the impact of cost and charges, which Young hints at..

The assumption that we can get a real return on our post retirement savings of 2% +CPI is also questinable in the UK, where too  little is known about what happens to our savings in decumulation.

If we look at nominal gross  returns on drawdown at around 6% and typical drawdown costs at 2%, then a real return of around CPI + 2% has beenn achieved over the past 10  years. Similarly, the lower charges  and more aggressive investment strategy on accumulation makes the CPI+3% return target realististic- especially as the 10% clip makes this a net return of around CPI + 2.5%. But many would regard investmet conditions since the onset of auto-enrolment to have been kind to workplace pensions and to drawdown policy.

What consensus there is, suggests that the OECD may – in including auto-enrolment as part of a mandatory pensions framework , be being a little kind to the UK.

The over-riding factor that impacts outcome is of course money-in, and while we may give the OECD the benefit of the doubt with regards theri  “efficiency measures” , it seems clear that they are taking into account too high a contribution in – especially for the low earners who are most impacted by the band of earnings against which no contributions are made.

While contributions against total earnings are scheduled to be baked into AE by the middle of this decade, the legislation for doing this has not been written , let alone passed. And it may not be.

Any attempt by the Treasury to turn off the triple lock , based on the OECD’s work, should be resisted. Auto-enrolment is not part of the UK state pension nor should its outcomes  be used as a subsitute for state pension increases. Auto-enrolment is not a tax.

So is the OECD right to double the value of the UK pension framework?

The most fundamental challenge to the OECD is that auto-enrolment does not (yet) provide pensions – as Llanwerne thought it might.

Trevor Llanwarne may have been provied wrong that we would have “defined ambition” CDC style pensions by 2020 ,but  he was right in predicting that most of us would come to think of contributions to workplace pensions as part of getting paid.

I would hope that by the time most of us come to draw our pots down, options along the lines of Steve Webb’s original vision for an alternative to compulsory annuitisation may have emerged. So I can live with a CPI +2% return on post retirement savings – so long as I’m getting the capital in my pot , paid to me at the same time.

I am happy to live with the CPI+ 3% assumption on gross roll up, a 10% clip on outcomes as a proxy for charges and an earnings role up as low as 1.25%. We must make assumptions to make comparisons and the OECD are better placed to make these cross-border comparisons than most. But I’d expect them to be challenged, not least by people who read this blog.

I suspect that the “money-in” calculations that lead to our shooting up the OECD’s league table for national pension frameworks is wrong and that that could give the wrong messages to our Government. David Robbins picks up on the SNP’s use of OECD numbers to drive their pension policy. This assumes an independent Scotland which of course we do not yet have.

Right now , we have a UK wide policy on state pensions and the stated policy for the future is to increas auto-enrolment contributions (to include removing the lower contributions band) from the “middle of this decade”. This is a very easy committment to backslide from.

The triple lock is also very easy to back-slide from.

We need to make it clear to the policy decision makers in Westminster , that the OECD numbers are based on what would happen if contributions were to increase (rather than on today’s nummbers) and make sure they understand that the OECD is assuming we keep charges and costs down and sort out the post retirement mess we are currently in.

If the DWP feels comfortable that all these things will happen, they can start to promote AE as part of Britain’s pension framework.

But not until….

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to The OECD double our pension expectations – we all need to read the small print!

  1. John Mather says:

    Henry can I suggest that AgeWage has its own benchmark as a % of National Average wage provided by a combination of State pension and Private pension. Also accounting for inflation

    As is so often said it is outcomes that matter. Averages are not helpful to the beneficiaries, you can have an average body temperature with your feet in the fridge and head in the oven.

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