Thanks to Peter Cameron-Brown for reminding me of where the pensions industry was in 2005 when the original Pensions Commission (PC1) was announcing its findings.

This is the NAPF’s (now Pensions UK’s) response to “Turner”.

Reading it 20 years later we can see how the pensions industry and Government had let pensions crash off the track.

Pensions are back on the track but the pension industry as it was in 2005 is complacent about the future. It is worth reading the NAPF’s response to Turner.  It is worth putting this up against the second Policy Commission’s Terms of Reference’s  “background”

The first Pensions Commission (2002 to 2006) delivered real progress, setting the course for a fairer, simpler State Pension and Automatic Enrolment (AE), getting Britons saving for their own retirement once again. But creating savings pots is not the same thing as delivering a pensions system. As things stand, future pensioners will face incomes that are too low, risks that are too high, and a system that is too unequal. So now is the time to finish the job of delivering financial security in retirement and supporting those approaching retirement.

AE has meant millions more people are saving something toward their retirement, but if we continue as we are too many will miss out on a financially secure retirement. Put bluntly, private pension income for individuals retiring in 2050 could be 8% lower than those retiring in 2025 – undermining a central measure of societal progress.

Four in ten working age people in Great Britain are not on track to meet their target replacement income (roughly two-thirds of their pre-retirement income for an average earner) during their retirement, while 3-in-4 people are set to miss having a ‘moderate’ standard of living in retirement (estimated to be around £31,000 a year by the PLSA). These measures of adequacy do not include the cost of housing for pensioners, increasing numbers of whom are expected to be in rented accommodation or still paying off a mortgage during retirement, putting significant additional strain on pensioner incomes and the state.

The shift from predominantly Defined Benefit (DB) to Defined Contribution (DC) pensions, alongside the emergence of Pension Freedoms, has also fundamentally shifted risks from employers to individuals. Alongside investment return risk, people saving into DC pension schemes now retire with a savings pot rather than a pension income for life. This leaves them facing longevity risks that are very difficult for any individual to manage in isolation, when one-in-ten men aged 66 years old today could reach the age of 96 and one-in-ten women of this age could live to 98.

The result is people are now facing complex decisions about how to best utilise a DC savings pot, and often without much help: forthcoming research shows that in the last 12 months only 16% of 40 to 75 year olds used a regulated source of advice or guidance. Evidence to date shows that over half of pots are accessed as cash, increasing the risk that their savings will not provide sufficient financial support throughout retirement. The measures in the Pension Schemes Bill will start to address this – but there could be scope for further innovation.

There are also significant inequalities in retirement outcomes, with lower earners, women, carers, and the self-employed all at greater risk of low living standards in retirement. For the self-employed, pension participation rates have dropped from 50% in the late 1990s to less than 20% at present. While we celebrate the success of AE, we must not forget that only around half the working-age population are currently saving into a pension.

The world has also changed significantly since the work of the first Pension Commission. The changing labour market means that more people are in insecure work and many more people are now self-employed, with real implications for retirement

outcomes. Lower rates of home ownership have also created challenging conditions for future pensioners.

The introduction of Pension Credit reduced pensioner poverty significantly under the last Labour Government, but pensioner poverty has risen again in recent years, not least for older and single pensioners. Ill-health and disability are also increasing, with too many older workers leaving the labour market before State Pension age. These shifts combine with longer term demographic trends: the pensioner population is expected to increase by over 50% between 2024 and the 2070s, whereas the working age population will only increase by over 10%. Expenditure on State Pensions is projected to increase from 5.2% of GDP in 2024 to 2025 to 7.9% by 2073 to 2074.

Two decades on from the first Pensions Commission it is time to finish the job, delivering financial security in retirement and supporting those approaching retirement through a pensions framework that is strong, fair and sustainable. We have revived the Pensions Commission to take on this task.

To remember

The NAPF in 2005 , speaking on behalf of the pension industry, had this to say

Nothing wrong with private pensions

We do not entirely agree with the statement that the private sector pension
system is in significant decline; rather we believe that it is undergoing
significant change. It is true that traditional final salary schemes have largely
closed to new entrants in the private sector but they have been replaced by
alternatives, particularly trust-based or contract-based DC. The main issue
here is not that employers are stopping their sponsorship of workplace
retirement provision but rather that they have changed the nature of it from
one where the employer shouldered the major risks (investment, longevity,
inflation, annuitisation) to one where those risks have been largely
transferred to the shoulders of individuals.

The NAPF argued that the shift to DC was (in the light of contracting out and unbundling of health and death benefits seeing the DB contribution average fall from 17% to around
13%.

The answer put forward by the NAPF was an incentivised voluntary such as the American system which then was considered a model that the UK could follow.

This in 2005, 20 years ago; it basically held out that the NAPF wasn’t a quite representative slice of Britain

We would point out that the sample is a self-selecting sample of NAPF scheme members and not necessarily representative of all workplace pension provision.

but that NAPF members were getting back to the level of contributions that they set out with in the middle to late part of the 20th century. No need to mess with private pensions.

 A Citizens Pension can do it for the poor

The NAPF document goes on to claim that occupational pensions cannot operate fairly for people earning less than £15,000 (in 2005) because of pension credit and contracting out problems (para 36).

The NAPF’s answer was a Citizen’s pension;

This report confirmed that a Citizen’s Pension set
at £105 a week could be afforded now if the money currently spent on the basic state pension, second state pension, contracted-out rebates, and pension credit were pooled together and redistributed.

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The NAPF’s  way to put things right in 2005

Even taken into account inflation over 20 years, it now seems laughable that we considered that just over £5,000 would have been considered liveable.

The NAPF’s response ignores a system of auto-enrolment , instead arguing for the Citizens Pension and incentives on people to save voluntarily and an easement of regulation on NAPF members.

It seems ludicrous that the pensions industry was so out of kilter with Turner and his commission. The strengthening of the State Pension , the abolition of the second earnings related pension and its replacement with auto-enrolment have meant that there is some sort of potential pension system for those in workplace pensions (but not yet pensions).

Auto-enrolment has by-passed a high percentage of people of working age who the Pension Commission will look at ways of getting inclusion but we are a huge way from a completion of the job for the millions who have saved but have no way of telling what they are getting.

Are we putting things right in 2025?

The pension dashboard coming next year and default retirement income which will be coming the year after are the two mechanisms the Government is relying on. With that it is hoping that a system that measures and promotes value for money, will give people protection from poor service , that and consolidation of small pots , weak schemes and sub-scale commercial providers.

Let’s hope that the Pension Commission can show us how those auto-enrolment have missed , ensuring we make pensions not savings the focus.