“The purpose of the Mansion House reforms is to make us save better. The reforms are not about us saving more – though restoring public confidence in pensions should lead to higher savings rates”
This is not a parliamentary answer by Laura Trott or Jeremy Hunt, but my interpretation of the messaging coming out of the Treasury (and the DWP) over the past few days. It is also the implicit message of blogs from Nausicaa Delfas and Lou Davey of the Pension Regulator.
The position of the Government is not the position of many in private pensions, here is a friend in an open letter to me and many others following the publication of the DWP’s independent review of the Pension Regulator
There was not – as far as I saw in an admittedly quite rapid read – any reference to the problem that the majority of people in private sector pension schemes have expectations for their pensions saving outcome which are significantly greater than they are likely to achieve.Or of the adequacy of savings being made, at all, or relative to expectations.It can be argued. I think, that it is not the Regulator’s job to ensure adequacy, but should private scheme members having a general false impression of what they are going to get, not merit some thought – even if only to acknowledge it and explain why?I know that the Regulator’s first statutory objective is ‘to protect the benefits of members of occupational pension schemes’ and that does not require a quantitative, comprehension or adequacy aspect. It just means, strictly, that the members must get what they are promised, however good, bad or indifferent they happen to be.But (a) is that objective – coined in the days DB dominated – sufficient, in a DC world, and (b) the risk is clearly understood – as you would expect – by the regulator, as (for example) in their 2021 strategy, which says, in bold, ‘savers who are building their pension pots can expect us to enhance the quality of their savings outcomes’If the quality of savings outcomes will not be judged by whether or not people get what they expect – the test of quality in just about every other aspect of goods and services – what will it be judged on?
There are many indications that – relative to the behemoths of the state pension and the DB system, workplace DC saving is currently making a negligible contribution to adequate incomes for the bulk of the publication. LCP’s analysis of the situation (though Pre- Covid) holds good
Over time , this will change and DC saving will not replace DB benefits unless
- The saving turns to DB style pensions
- Auto-enrolment as a quasi pension tax turns up employee and employer rates
The increased importance of the state pension to women, is not about better state pensions (there is some residual bias in favour of women but not much), it’s because women’s lifetime earnings are lower so do not spend as much on their retirement through payroll.
We can expect over time to see DC workplace pensions start looking more like DB (either through CDC or more likely through longevity pools emerging in a less formal way. We may even see the emergence of capital backed scheme pensions as an alternative to annuities.
As regards AE savings rates, the Government is yet to be in breach of promise. It promised to increase contributions in line with the 2017 proposals and has put in place the legislative mechanism for this to happen. The proposed timeframe is the middle of the decade and that is flexible. Clearly the Government is no hurry to make this 2024, probably expecting the current eye-watering increases to mortgage payments to recede within the “window”.
The timing may not be as the pensions industry wants, but it must remember that it is benefiting from higher interest rates in other ways. The long-term direction of travel is clear.
A word about second pensions
A lot has been made about AE replacing stakeholder pensions as the top up to the state pension. The forgettable stakeholder regime was introduced in conjunction with SERPS as it morphed into the State Second Pension and was supposed to take up the slack of the dilution of the original SERPS system. SERPS had already been dealt a blow when an opt-out was offered in 1987 – as part of the launch of personal pensions. The opt-out is probably the largest mis-selling of pots over pensions on the record.
SERPS was butchered , but it was still around at the start of auto-enrolment as S2P. It was finally laid to rest by Steve Webb when the single state pension arrived in 2016, though the transitional arrangements for those with SERPS/S2P in payment persist.
The Government have never recognised the AE saving regime as replacing S2P but it has. Thankfully, the single state pension is now at a level that it (alongside pension credit) provides a universal benefit that forms the majority of our retirement income (see above).
The Government Actuary, in one of his five year reviews in 2015 wrote
The implication is that the way to protect Government from increasing the National Insurance Fund which pays state pension is to create private provision that renders that obligation redundant.
Those of us , who see an increase in private retirement saving as a means to improve on adequate retirement income would be well to remember that.
Saving better not saving more
The only time I have been quoted in parliament was by Barbara Castle who used a statement I wrote in a stakeholder submission that
“private savings should aspire to the efficiency of SERPS”
While this went down like a lead balloon with my colleagues at Eagle Star, it was acknowledged by John Shuttleworth as a pretty good statement. This is not surprising as John, who sadly died shortly after I met him, coined the phrase.
We are trying right now to get pensions to aspire to the efficiency of the State Pension , which – for all the recent cock-ups – is a more efficient way of turning payroll deductions into later life income than workplace pensions will ever be.
SERPS was not sustainable because it was poorly promoted and little supported. Ultimately it got replaced by auto-enrolled workplace pensions – we are where we are.
We may need to save more but we can certainly save better. Let’s save better today and more may follow.
