What is pension policy for?

Social media affords some amazing insights – this from an anonymised twitter follower making use of direct messaging.

I am fed up that pensions policy is being driven by people whose knowledge and experience and especially way of thinking is dominated by

(1) having grandparents or perhaps parents who have very comfortable retirements

(2) work in financial services.

The impact of pensions policy on individuals should not be decided on by such a bubble.  Not at least till  we sort out middle/lower earners.

I am thinking about say percentiles 3 to 8 of the population. 1 and 2 are on pension credit and 9 and 10 are always fine but of course moan the most that the system should be even better for them.

I am not sure if this is a direct attack on me – I fall into both offending categories – but I can comfort myself that I have zero influence on pension policy!

I do agree with the Direct Message. But I don’t think we should be firing all the policy makers. Instead we should be holding them to account – through a proper understanding of what people want and what they do.

And we need a framework to understand pensions

We should be thinking about retirement savings , as the World Bank has suggested for decades, in terms of three pillars

Pillar one is supported by general taxation and provides something like a minimum retirement income for everyone.

Pillar two is based on lifetime earnings and is primarily funded by employers and employees (with incentives from general taxation);

Pillar three is orientated around the management of wealth and is a facility for the affluent to manage their financial affairs efficiently.

It should not be more complicated than that.

Pillar one; we must make sure that the safety net has no holes.

Other than a very few experts (Gareth Morgan stand up), virtually nobody is concerning themselves with the fate of mixed age couple claiming the state pension having been on pension credits. Listen to this gentleman explaining how pensions policy is impacting him.  (from 3.51.40)

The voices of those struggling to meet their bills because state benefits fail them, need to heard by those who shape public policy. But they do not represent a majority  thankfully.

Pillar two ; a mostly funded system that pays pensions based on lifetime earnings

I  agree that pension policy should be focussing on the majority of people who are not claiming benefits but are not “wealthy” enough to participate in wealth management. These people are being served up a rubbish diet of Pension Wise , Investment Pathways and gimmicks by way of stronger nudges, statement seasons and mid-life MOTs.

Pension policy should be about putting the right money in the right hands at the right time, not about “engagement”, “self-empowerment” and  “financial wellbeing.

If we are to have a funded second pension, and many of my friends think we could have done better not dismantling SERPS, then it needs to deliver funded pensions , not pension pots. This means pursuing all that makes for pensions – reviving the annuity market – for those who want guarantees and creating affordable targeted pensions through CDC.

Ultimately we should have a vision of a second pension system where everyone has a second pension which reflects lifetime earnings where competition between providers focuses purely on improving member outcomes by providing better value for money.

It means creating an expectation of future funding of second pensions where those in auto-enrolled workplace pensions can expect a contribution that is in line with what is going into public sector pensions. That means levelling up both employer and employee contributions and including more people in funded pensions.

If we have accepted that the defined benefit system is no longer affordable, let’s stop pretending that we can afford it for the public sector and for quasi public sector schemes like USS and the Railways. Let’s make Royal Mail their example and explain to people in 3-8 that the consequence of guaranteeing future benefits is sub standard public services and lower pay. That means capping and gradually reducing payments into DB schemes as they are released from guarantees and move to paying pensions conditional on their capacity to do so.

If we are to have an unfunded state pension, let’s invest in making sure it pays out properly, to the right people , at the right time – the right amount.

What is lacking today is any sense of a unified pension system where everyone participates in a single state pension  and everybody expects an earnings related pension as a second pension.

Pillar three ; a wealth management facility , supporting the needs of the affluent

The third pillar – what we choose to do for ourselves by way of wealth management is a luxury item that people can choose to transfer second pillar benefits to, but which is not the second pillar. Confusion between voluntary savings and what is done in the workplace will recede over time, right now wealth management needs to be treated as  separate from pensions, it should not be driving pension policy as it often is today.

Is pension policy focussing on the needs of the majority?

I don’t expect things to change immediately. It won’t happen organically, it will happen from the top down. Senior management , from the Minister down, needs to have a clear plan  which can be articulated both within the policy units and to the general public.

We are actually moving towards the vision I have articulated. The State Pension is in much better state than it was and for all its faults, universal and pension credit is an improvement on what went before.

The second pillar shows signs of re-establishing itself on a fairer footing. The consolidation of second pillar pensions, the fulfillment of auto-enrolment and the introduction of CDC make it possible to think of everyone participating in the second pillar where pensions are funded to pay against lifetime earnings.

Wealth management is thriving. It is diverse, offers advice and gives people the chance to have their money managed as they choose. Properly regulated so that people do not self harm, it is capable of doing much good.

Or is it overly focussed on the needs of the wealthy?

Yes, there is a bias in our system that focusses on the needs of the wealthy and this needs to be addressed.  I think this is happening but it could move faster. A stronger focus on inclusion and fairness will provide faster movement.

But we cannot expect to change policy making through revolution, indeed this blog suggests that the answer is returning to the basics – the three pillars.

Organisations such as the PPI and the many excellent think-tanks that I quote from on this blog – are broadening the debate away from the pensions lobby. But most of all, we need to be listening to what people are actually saying about their pensions and doing with them.

That means focussing on the data we have available and making sure it is telling us the right things.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to What is pension policy for?

  1. A single pensioner (for simplicity, without any income) has an entitlement to means-tested benefit, from this April, of £182.60 a week. With a younger partner (again with no other income) they have an entitlement of £121.32 a week. An extra person *reduces* income by £61.28 a week. I wouldn’t invest in any older person matchmaking agencies.

  2. Bryn Davies says:

    Just a correction. It’s not the OECD that suggests we think about pensions policy in terms of “pillars”, it’s the World Bank in it’s report back in the 1990s. In fact, the OECD specifically avoids the use of the pillars mataphor, as it considers it to be a prescriptive rather than a
    descriptive typology. In other words, it presupposes the policy answer. See the discussion in the 2005 edition of Pensions at a Glance.

  3. henry tapper says:

    Thanks Bryn , new readers of the blog will notice the change has been made.

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