Let’s get on with it.
The last 20 years have seen a huge strain on employers as funders of workplace pensions. Not only have they had to keep funding DB pensions but they’ve needed to comply with deficit funding plans demanding large payments to the trustees on top.
Meanwhile the company is still on the hook for DC contributions. What is seldom recognised is that prior to auto-enrolment, many organisations targeted pensions to parts of the workforce that they particularly valued. Pensions were more than a perk, they were a means of deferred compensation for the core workforce. Auto-enrolment changed all that. Companies were required to contribute for all eligible and quite a few non-eligible jobholders who opted in. They were even on the hook for their contractor’s pensions , if they followed the letter of regulation.
Hundreds of thousands of small employers who had never before budgeted for staff pensions found direct debits for workplace pensions eating into profitability. The strain of auto-enrolment has been high. I know, I pay those employer contributions too!
All this was swallowed by employers with good grace. But it is one of the reasons while real wages fell over the past fifteen years and both employers and employees have had to consider the strain of auto-enrolment in wage settlements. We may say that pensions withstood the cost of living crisis, but many people standing in the food bank queues , were doing so because of cuts in their real take home pay.
At the high water mark of confidence in auto-enrolment in 2017, at a point when all but the smallest employers had enrolled, a recommendation was made to Government to increased the depth and breadth of auto-enrolment by reforming both the eligibility rules and the amount of people’s salary against which contributions would be made.
The decision to defer implementation to the mid-point of the following decade (eg now) was seen as political by a pensions industry that fed on “new business” to deliver bigger pots to members and bonuses to staff.
In the intervening period we have suffered several economic set-backs
- The very real economic and societal impact of COVID (much in the news today)
- The transition out of QE and the disastrous mismanagement of Trussenomics (that wiped £600m off the asset base of DB and a further unquantified amount from DC pots
- The cost of living crisis that resulted from macro-economic facts post the pandemic.
The Britain we are today is not one that the architects of the 2017 reforms could have imagined, in many ways, both the economy and the funded pensions it generates, have been in retreat.
I am not an apologist for the new Labour Government’s decision not to include implementing the AE reforms in the Pension Schemes Bill announced this week. But I think that the decision to further delay the increases is the right one. We need to work out just what we are expecting auto-enrolment to do. We need to have a clear and common purpose for it.
Without straying too far into politics, I can see in the Pension Schemes Bill , a recognition that workers may be better served by pay settlements that improve the purchasing power of their payslip. Steve Webb may consider this a Conservative view, but he knows that it was in coalition and subsequently under two Conservative Governments that the State Pension recovered.
Second: There’s nothing in the proposed Pension Schemes Bill which a Conservative Minister would have any problem with. Distinctively ‘Labour’ pension policies may have to wait a bit (2/4)
— Steve Webb (@stevewebb1) July 17, 2024
Apart from the pension freedoms, pension policy over the past fifteen years has been remarkably socialist. While we have talked up private pensions , we have paid up for public ones and in particular for the universal state pension.
A friend of mine describes AE at its current rate (considerably lower than 8% of earnings for those on less than average wages) as a “sidecar” to the state pension. If the replacement cost of a full state pension is around £250,000 , AE savings offer little more than a fifth of that amount.
If instead of capitalising pensions by “pot” we think of “pots” in terms of “pensions”, the average aggregated AE pot is worth to someone at state pension age around £2,500 pa. It is the sidecar for most people on low earnings. But it is £2,500 more than they would have had if they had opted out, for many that £50 pw will be enough to maintain some dignity in retirement.
The question that should be being asked by those urging more saving on more people is whether the next £50 pw should be from their workplace pension or from the state pension. The reality for most people on below average wages is that since the start of auto-enrolment in 2012, they have built up more pension from state pension credits and the triple lock than from what they’ve sacrificed by way of wage settlements to build a pension pot.
If we are serious that the purpose of pension contributions is to pay a pension, then the biggest contribution to “adequacy” has been made through the state and not from private pensions. This is very well understood by Martin Lewis and his followers.
The Labour Government should be celebrating the state pension’s progress since the implementation of the triple lock – even if it happened under a previous Government and I hope it will use the forthcoming review of workplace pensions to make the points above, the State remains the primary provider of pensions to the poor and important as sidecars are, for most low earners, the AE pot is no more than an AVC.
In this context, the decision of the Labour Government to focus on making the conversion of pots to pension and the measurement of VFM in workplace pensions is understandable. If there is no more money to pay higher contributions then the best way forward is to make the most of what has already been paid. This will frustrate the pensions industry which is rewarded on inputs and funds under management and not on outputs, but it is an approach that will find approval among the populace. We would rather get more pension from our pots , both through more efficient conversion and through more efficient growth, than be lumbered with more contributions.
And employers who have been burdened with the on-costs of running their own pension schemes would rather pass these on to superfunds who can manage at scale and without the replication of advisers, trustees and administrators needed to maintain 5,000 DB schemes. Freeing up costs from the legacy of DB can lead to the reallocation of pension spend to the DC savers, without further indenting for pensions from the P/L. The Labour Government has also recognised the capacity of DB consolidators to run our pensions on more efficiently.
The overall message is clear, we need to make the best of what we’ve got rather than take more money to invest and provide pensions inefficiently.
