Last week the Institute of Fiscal Studies launched a major project reviewing the UK pension system and the future of financial security in retirement. It will do so not with public money but with money from a trust set up by an asset manager.
Although it will be “working with” Alistair Darling and David Gauke, they will be featuring in a private capacity and not as representatives of Government. Joanne Segars is also within the camp – she has worked variously for the TUC, ABI and PLSA and is now pursuing a career as a pensions expert.
What will the review be and do?
The Pensions Review will be a multi-year project that will assess the consequences of current pension policy, the economic environment and individual behaviour for living standards in retirement. The IFS expect it will provide recommendations for reform to improve outcomes for future generations of pensioners across the UK.
The review will be led by Jonathan Cribb, Carl Emmerson and Paul Johnson and claims it will systematically review the evidence on the challenges facing future pensioners and undertake empirical analysis to understand recent economic trends and how people have responded to previous pension reforms.
In addition it will engage with policymakers, employers, trade unions, those in the pensions industry and other stakeholders representing different groups in society to understand the key challenges and trade-offs.
The IFS expect it will commission opinion polling and public engagement activities to understand how people from across the country see the challenges of funding their own retirements, and gather their thoughts on potential routes for reform.
Isn’t this the Government’s job?
We know the IFS to be a force for good, it holds the Government to account in many areas of finance and its views are widely respected, but it is a charity supported by donations and by organizations that fund it. It’s naïve to suppose it is unbiased and over the years there have been many attempts to expose the bias in the IFS’ approach. Here is one.
The Government too is biased and that bias changes from parliament to parliament but its civil servants – those who work at key departments for pensions (the Treasury and DWP) are charged with being apolitical and servants of the general public.
I worry that the IFS has taken upon itself a job that in previous generations has been done by Government or at least by Government appointees. The launch of the event on April 20th, was marked by a keynote address from Lord Turner who chaired the last Government funded pension review in the early years of the century.
The recommendations of the Turner Review (from the Pension Commission) were generally adopted and led to the major private/public partnership of the first quarter of the century- auto-enrolment.
But there were less happy outcomes following the review. The drawbridge on defined benefit pension schemes – at least in the private sector- is being pulled up on generations to come and while the current generation of pensioners has “never had it so good” , the same prospects are not available to those yet to reach the retirement zone.
The case for a pensions review
Whether you consider it hubris or boldness, the IFS has set out its agenda for change – and stood in for a second pension commission , which many in pensions have been calling for.
They are making the case for doing so by identifying eight areas of policy failure which the review will investigate and report on the key finding of the IFS in its current work;-
1. Many employees are only saving very little for retirement.
2. Fewer than one-in-five self-employed workers are saving in a pension. This compares with around a third when the Pensions Commission reported.
3. Most private sector pension participation is in the form of defined contribution pensions which leave individuals bearing risks that are difficult to manage well.
4. Increasing numbers approaching retirement live in more expensive, insecure, private rented accommodation.
5. Higher state pension ages are a coherent response to the challenges of increased longevity at older ages, but they pose difficulties for many and longevity improvements have not been as big as predicted a decade ago.
6. Demographic and other pressures mean that spending on state pensions and other benefits for pensioners is already projected to rise by £100 billion a year by 2070, with even bigger increases in health and social care spending.
7. Those retiring with defined contribution pension pots face considerable difficulty and risk in managing their finances through retirement.
8. While current pensioners are still doing well on average, and many of the recommendations of the Pensions Commission have been successfully implemented, the future looks risky at best for many current workers hoping for a comfortable retirement.
These are the terms of reference for the review, and these terms represent bias’s that are inevitable but need to be flagged. The report will be about saving, it will focus on individual decision making over financial management, it will review Government decisions on the state pension age and the fiscal consequences of decisions about inclusion, contribution rates and pension freedoms.
These are the terms of reference of the PLSA, ABI and IMA, the principal trade bodies of the financial services industry but these organizations do not run Government, they are primary players in the financial lobby. Abrdn, which is sponsoring this review, is a part of that lobby.
What will the IFS review – do?
The IFS review will look at the financial futures of people retiring in the UK or on UK savings through the lens of the IFS and those who support it. Generally speaking, that lens is transparent, it presents facts in a relatively unbiased way but it represents a paradigm of thinking that is peculiar to those who manage other people’s money.
Many people in this country do not have savings and rely on benefits or the goodwill of others – particularly families. These people exist outside the reach of financial services and quite possibly rightly so. Yesterday’s pension playpen coffee morning was focused on how such individuals could provide for themselves through direct purchase of pension bonds (Selfies). Will such thinking be embraced in such a review – or even considered? What about the work being done to broaden take up on Pension Credit? The terms of reference seem to think exclusively about inclusion in terms of broadening the net of “saving” as the financial services industry likes to think of it.
I suspect that the IFS review will do what the financial services industry wants it to do, which may not be what the Government wants. This is where it differs from the Pension Commission and why I am interested but not no more – in its outcomes.