The Government has published an open consultation;

Second State Pension age review: independent report call for evidence

It asks for us to go back to first principles and consider why we have a state pension and who pays for who. In this blog, I focus on my key worry, which is that we assume. because auto-enrolment is working well for many, it can work well for all.

The broad scope of the review suggests that the Baroness Neville-Rolfe may be anticipating responses that call into question the state pension’s current purpose. It is one thing to question the age at which the state pension is paid, another to question how it is paid and to whom.

There are many for whom a market related pension isn’t going to work. Rather than trying to include everyone in auto-enrolment, we should strive to include everyone in the state pension and target AE at those who have the means to build an extra pension as they choose.

So what is being asked of us by Baroness Neville-Rolfe DBE CMG?

The consultation asks us to consider and respond to a number of questions which I’m listing below.

 Intergenerational fairness:

• As people are living longer, how do we ensure the costs of State Pension are shared fairly across generations?
• What factors relating to intergenerational fairness should be considered when determining the State Pension age?
• Is it reasonable to give people a fixed period of notice for State Pension age changes, and if so what period?

Changes in the nature of work:

• How have changes to the types of jobs people do affected working lives?
• What are the anticipated future changes to the workplace? How could this impact on people’s working lives?
• What factors do people consider when making decisions about when to retire?

 Sustainability and affordability:

• What is the most sustainable and affordable way of managing the cost of State Pension in the longer term? What are the advantages and disadvantages of potential options?

 Metrics for setting State Pension age

• Is it reasonable for people to expect to spend a fixed proportion of their adult life in receipt of State Pension?
• Are there options for taking account of differences in circumstances when setting State Pension age in future? What are the advantages and disadvantages of these options, and how could they operate within the current pensions framework?
• How can we best take into account the sensitivity of the life expectancy projections when considering an appropriate State Pension age for the future?
• Are there other metrics which are relevant or more suitable to help determine State Pension age in future, and if so, what metrics?
• What factors do other countries consider when determining State Pension age?

The right questions

It is right that we regularly ask these questions in this way and that the answers are determined by the particular circumstances we find ourselves in each time we review the State Pension. It is a little unfortunate that this “second ” review reminds us that we no longer have a “second state pension”. What we have instead is a semi-compulsory system of retirement saving which provides market returns and is not underwritten by the tax-payer as Serps/S2P was).

For many, the critical question we must answer is whether this additional saving is integrated into the design of the State Pension or ignored. Those who argue that it could be integrated, point out that it could act like a Barbell, where aggressive retirement savings strategies could offset the pedestrian but certain progress of the state pension.

I see this as sensible to a degree. But I do not see Auto-Enrolment as a universal saving system, there are too many people who cannot save for that, and even those who can save but choose not to, should not be denied  a proper state pension – effectively as a punishment for financial delinquency.

And what cannot be allowed to happen is for our retirement savings to be considered a replacement for the security of the State Pension. I fear there are many in the pensions industry who have in mind a system of auto-enrolment which ensures long-term pension adequacy from the auto-enrolment system for all.

Pension auto-enrolment: call to abandon £10,000 threshold’ https://t.co/wjJqjKRuiB

— Josephine Cumbo (@JosephineCumbo) February 10, 2022

The proposal to abandon the earnings trigger and auto-enrol all earners would of course benefit many pension providers but how would it impact low earners?

For a cogent discussion of this question, read Sarah Davidson’s article which can be accessed here.

To extract two key paragraphs

how on Earth lower earners can possibly afford to save more into a pension at the same time as paying energy bills rising by around £600 this year, and higher food, fuel and clothes costs, all while the value of the pound in their pocket drops by a staggering seven-ish per cent over 12 months?…..

Messrs Sunak, Bailey and co might be in a financial position to suck it up and see virtually no change in their day-to-day comfort. But there are millions for whom this slide from state to self will mean going without meals and risking hypothermia, pneumonia and in the most extreme cases, death.

I suspect it would cause the kind of anguish that can only be understood by those who have no money and little prospect of having more. Such people are beyond the ken of most of us in financial services.

Low earners are dependent on the state pension and other in-retirement benefits. Could auto-enrolment become a means to swap dependency on the state for dependency on market returns? This cannot be allowed to happen, it is not how we take care of those with least.

So my response to this inquiry will be that we focus on  our workplace pensions as an independent source of retirement security from the state pension, not one that gradually replaces it.

The State Pension, like the NHS, must be available to all . It must aspire to  underwrite an adequate standard of living for everyone, not just those who save for retirement.