Intervention one – The Turner Commission.
It is useful from time to time to revisit the work of Adair Turner’s Pension Commission which first reported in 2004. 18 years on the generation it considered “young” are now approaching the “normal minimum pension age” (55). The big problems that Turner identified are summed up in this paragraph
Due to increasing life expectancy and a low predicted birth rate, the Commission predicted that the percentage of the population aged over 65 would double by 2050, putting further strain on the pension system. However, perhaps the most shocking finding was that 60%, a clear majority, of
employees over 35 were on course to have inadequate pensions.
The Commission concluded that private savings were not responding on anything near the scale required to offset these developments and were, in any case, highly unequally distributed. The combined result of all this was that, on a business as usual path, pension accrual was “both deficient in total and increasingly unequal”.
There were three “killer facts” that Turner identified as the cause of the deficiency.
- There weren’t enough savers. The proportion of UK private sector workers relying entirely on the state sector pension was 46% in 1995 and had risen to 54% by 2004
- We don’t voluntarily save properly. Only about 0.5% of people make pension saving decisions on a rational basis of the type economists use to model and predict behaviour, taking into account interest rates, discount rates and the net present value of their assets
- Small companies don’t do pensions. It was impossible for small and medium sized enterprises to offer occupational pensions without administrative fees so high that they ended up consuming a punitive proportion of the employee’s contributions
It took another eight years for a system to be put in place to counter these three “killer facts”. Auto-enrolment took another 6 years to fully stage and has only been properly up and running for around three years. But it has changed the landscape. We are mostly saving something, we are saving in an organised way and small employers are joining in, walking away from running their own schemes and participating in the schemes of others (master trusts and GPPs).
The reason we had a Pension Commission was Tony Blair. He appointed Turner in 2002 because he could see the writing on the wall for defined benefit schemes even then.
Turner’s initial report was followed in 2005 by the Commission’s proposals and in 2006 by the Government’s white paper “Security in Retirement: Towards a New Pensions System” , which established the policy trajectory we have followed ever since. Despite opposition from the Treasury (in particular Gordon Brown), the white paper adopted the main proposals from the Commission.
This intervention by Blair was thought through and fulfilled. It remains the crowning glory of pension policy this century , a match for the Beveridge report of 1948.
Intervention two – Pension freedoms
Since Turner, there has been two further policy interventions from Downing Street. Neither have been thought through or implemented with the help of a Pension Commission and it shows.
The first is the introduction of Pension Freedoms in the 2014 budget , which became law in the subsequent Finance Act and landed from April 2015.
These freedoms granted those with DC pensions, that allows people to draw their savings without tax penalty, at any time after the normal minimum retirement age. The impact of this policy has been to encourage saving but at the expense of predictable outcomes. Workplace pension schemes are more properly workplace savings schemes.
And the freedom to access money at 55 without buying an annuity has been taken
The majority of small pots that are accessed – are cashed out before default investment strategies mature and before the miracle of compound growth has done its work.
Yesterday I suggested that these pots may be behind the reported loss of 630,000 mature workers from the labour market. If so , pension freedoms are losing us productive labour at a time when we have a labour shortage as well as cropping pensions pots too early.
We forget how new pension freedoms are. As this article explains, there’s going to be a lot of people reaching their 70s with nothing left. https://t.co/d3C5sZsHkQ
— Laurie (@GT_Laurie) January 29, 2022
The mantra of the Pension’s Commission, “work longer, save harder” is not helped by a normal minimum retirement age of 55 (or 57). The guidance that you can take 25% of your pot tax-free at NMRA is generally taken as advice (what’s not to like about tax free cash) and we are back to the killer fact that only 0.5% of people make rational decisions.
Intervention three – putting pensions to work
Tony Blair as prime minister, instigated the Pension Commission, George Osborne as Chancellor , the Pension Freedoms but it was both Boris Johnson and Rishi Sunak who wrote the pensions industry a letter requesting it to invest people’s money more productively, to sustain the planet and to build back Britain.
Their letter suggested that pension money was patient capital. It is a vision that chimes with Turner’s “work longer/save harder” rather than Osborne’s “spend sooner”.
If Pension Freedoms smacks of opportunism , this letter calling for Productive Finance reeks of it. Neither initiative is thought through policy in the way the Pension Commission went about matters.
If you are really wanting a pensions and healthcare system that is sustainable into the 22nd century, then you need people to work longer, save harder and invest better. That means building in some auto-escalation into auto-enrolment, increasing contributions and including many of those excluded from impulsion. None of these things is happening yet, the AE juggernaut is parked up – like a lorry outside Dover harbor.
If you really want patient capital, don’t keep the door open so that people can plunder their savings at 55. If you really want pensions to provide productive finance , give people a default mechanism to converting pots to pensions so they remain invested for the rest of their lives (CDC).
Three interventions – but only one with a clear vision.
Turner’s Pension Commission had a clear vision for the future, one that is being derailed by pension freedoms and the failure of Government and the industry to give people a reason to stay invested (investment pathways – pah!).
The Government now want pensions to become a source for productive finance and are pinning their colours to the mast of pension consolidation, which will make pensions broader but not longer.
We need to get back to Turner and think about a pension system as a way of countering the negative impact of an ageing society. The private sector has lost sight of its part in that process, obsessed by the land-grab for assets under management.
That doesn’t mean closing the door on freedoms, but it does mean incentivising people to save harder for longer. That’s a very tricky political strategy and not one that looks achievable through a strong nudge.