We want from pensions a wage that gives dignity in retirement

The DWP is tasked to deliver, what choices does it have?

When Adair Turner published the original finding of the Pension Commission he concluded

  • pensioners will become poorer relative to the rest of society; or
  • taxes/National Insurance contributions devoted to pensions must rise; or
  • the savings rate must rise; or
  • average retirement ages must rise.”

The words that get most mentions are “must” and “rise”.  This assumes that reasonable force must be applied to people’s work and savings for pensioner living standards to be maintained.

There are two levers that the Government can and have applied, national insurance and tax have risen and so has the state pension age.

But people have been left to save to a level they choose – since auto-enrolment allows people the right not to pay

People have been left free to retire at an age of their choosing , regardless of state or employment retirement ages.

Only in taxes do we have no choice, we have to pay taxes (and famously we have to die).

What common purpose do we have today?

This preamble leads me into this morning’s main event which is that we need to define a common purpose for pensions, this is defined in Australia as “the provision of a lifetime income that gives us dignity in retirement”. In Australia there are three things that must happen, death, taxes and Super contributions, there is no opt-out.

Many would argue that the same should be the case in the UK but we have chosen a different approach where people can opt-out and rely on private means, the state pension and benefits in retirement, Richard Wilson talked this week of this as “paternalistic”. Relative to Australia , whose compulsory savings offset the state pension , making the latter redundant through means-testing, the UK system is paternalistic, but it still retains a means-tested element, pension credit is not available provided you have a full national insurance history qualifying you for a full state pension.

And auto-enrolment will – even if you have less than a full entitlement to a state pension, invalidate a pension credit claim – unless you are very smart and get round DWP rules.

The common purpose for pensions in the UK is the provision of a lifetime income which , together with the state pension , gives dignity in retirement.

The link between state and private pension policy has recently been broken. Barbara Castle envisaged dignity in retirement being offered by the state pension , topped up by the state earnings related pension. Many employers took on the obligation of SERPS and agreed to provide a guaranteed minimum pension equal to SERPS , in return for lower national insurance. In 1987 individuals were allowed to do the same thing through personal pensions, their national insurance contributions were paid into a private fund that was supposed to match or beat a pension from the state. SERPS limped on a couple of decades more but was finally subsumed into the single state pension in 2016.

But in the meantime, the common purpose envisaged by Barbara Castle (and talked about by the Pension Commission) had been lost.

  • People had been encouraged to think of early retirement as a lifestyle objective
  • Company pension schemes often set retirement ages lower than the state pension age
  • Claims from private savings plans (personal pensions) gave people an expectation that early retirement was feasible (especially in conjunction with housing wealth)
  • The state pension was run down to the point that Michael Portillo could describe it as nugatory to the audience of an NAPF conference

Finally , the pension freedoms broke the link between pension savings and pensions, people were now saving for wealth in retirement, there was no common purpose to saving and there is now no common perception of retirement.

If we are to move forward, we need to re-establish the common purpose around the state pension and the state pension age, that should be the normal retirement age for working people and we should start thinking of early retirement as earned

We want freedom , including  the right not to make choices

This is a key learning that the DWP must take onboard. It harks back to the Pension Commission’s assertive phrasing.

We are a nation that believes strongly in the right of individuals to do as they please – save if their actions do harm for others.

The modern workplace pension works on a system of defaults, one of which is the default retirement age. This concept of retirement age varies from the state pension age (Nest) to whatever the providers consider sensible for their membership. This leads us to default funds that target the retirement age when something is supposed to happen. Finally we have default savings rates which are not targeting a certain outcome but simply the accumulation of a savings pot which people can spend as they choose. There is no common purpose in this, other than the need to meet the tax-rules ensuring “pension” status, and the auto-enrolment rules, providers can design schemes as they choose.

Pension people complain that the Government have made pensions complex, but are reluctant to get behind a common purpose for pensions. They fear telling savers that they are simply saving to top up their state pension using the private sector rather than SERPS.

Instead , they insist that people engage with choices on when and how they retire, speaking with Pension Wise from 50 and taking financial advice wherever possible. There is an assumption that because people have freedom , they have choices, but in reality most people have little choice but to carry on working and saving till they get to state pension age when they can pack it in.

For most people, “packing it in”, means giving up the illusion of early retirement and of pension freedom in return for a lifetime income that gives dignity in retirement. We have worked out that most people cannot afford to swap pot for annuity – it simply doesn’t give enough income. What people want is an annuity like product that gives more income. That is all that most people want from “pension freedoms”.

If people knew it, what they want is SERPS. Though SERPS was not politically acceptable, it was an efficient way to give dignity in retirement. CDC is the closest the private sector can get to meeting the common purpose.

If the common purpose of pensions is dignity in later life, it is delivered by CDC from state retirement age. We have the right to opt out of that – that is our freedom – but equally, we have the right to make no choice, that freedom not to choose is one that the DWP must deliver.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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