The last few years have seen valuable advances in workplace provisions. In particular, the roll-out of automatic enrolment has given millions of workers access to a pension scheme with an employer contribution.
But despite the success of auto-enrolment, your chance of having a workplace pension still often depends on your workplace and earnings. And even once enrolled, the level of savings made, the growth of that pot and their ability to turn it into a sustainable replacement wage in retirement are largely outside the individual’s control. Yet, for almost all savers, provision is still held to be primarily that individual’s responsibility.
This means that the insecurity being experienced by many of today’s workers, whether employed or self-employed, is likely to be amplified in retirement.
Over the coming weeks, the TUC will publish a series of blogs setting out the different elements of what we call the Great Pensions Lottery, and discussing how we can make the system fairer. But first we need to consider how we got to our current system.
How did we get here?
Modern pension provision has evolved since the Second World War. The initial decades were characterised by relatively strong state and occupational pension provision, at least for men in full-time employment. The fruits of this are being harvested today. Four in five pensioner households now benefit from workplace pension income. It was less than half in 1977.
This system unravelled from the 1980s as the government favoured individualism. And employers increasingly reduced or abandoned support for workers’ retirement provision. The result was a situation where, by 2012, a minority of private sector workers was enrolled in a pension scheme. The state pension dwindled in value.
Reforms rolled out from 2012 centred on automatic enrolment into workplace pensions, building on the work of the Pensions Commission that deliberated from 2002 to 2006. The body benefited from the input of commissioners with backgrounds in the trade union movement, business and academia.
By requiring workers to actively opt-out if they do not wish to save for retirement, as many as eight million more savers have been brought into workplace pensions with a compulsory employer contribution. A lid was put on charges levied on savers. And a state-backed provider NEST was established to not only ensure that all firms could find a pension provider but to pioneer standards across the pensions industry.
Crucially, the policy has also retained consensus support, surviving changes of government and holding the explicit backing of both employer and employee groups. However, this has been at the price of a painfully slow roll-out. Meanwhile, a new state pension has been introduced to the advantage of many low paid workers. But overall, it cuts the level of the state pension for most workers. And the level of the state pension in the UK is amongst the least generous in the developed world.
The reforms have yet to meet their full promise. Some half of adults remain outside the workplace pensions system. The grindingly slow introduction of recent reforms means those who are enrolled receive contributions that are utterly inadequate for a decent standard of living in old age. There remains no plan to improve them to effective levels. And there has been little progress in lifting the burden of key risks, such as returns from investment markets, from the shoulders of the individual.
There had been hopes that these changes would lead to what has been dubbed a Third Pensions Consensus. We would build on the Pension Commission reforms with a new settlement in which a decent flat-rate state pension was augmented by relatively well funded, and well-governed workplace pension schemes.
But while support for the initial Pension Commission proposals has been sustained, there has been little attempt to establish a fresh consensus on future reforms. For instance, appeals from the TUC and many others for a standing Pensions Commission to consider evidence for future pension policy initiatives, have hitherto been rebuffed. Meanwhile, different elements of the pensions system, whether the state pension, or the different forms of workplace pension have tended to be considered by policymakers in isolation without regard to how they interact. Meanwhile millions of people are headed for a poor standard of living in retirement.
Ministers have sometimes been distracted into other avenues that are at best irrelevant but in some cases greatly risk exacerbating the lottery elements of the current set-up. Where the Pensions Commission sought to utilise inertia to nudge people towards saving, innovations like the Lifetime ISA assume that the carrot of tax incentives is enough to encourage people to put money aside. There has yet to be much interest shown by savers. More dangerously, while workplace pension saving is driven by inertia, pensions freedom changes introduced in 2014 that allow a saver to cash in a pension at age 55 has placed decision-making, and responsibility if things go wrong, firmly on the shoulders of the individual.
The extent to which private sector providers can drive progressive change is limited. There is some innovation. The decision of some providers to compete on price has combined with a government-imposed cap on default pension investment charges to bring down costs for savers. Meanwhile, innovative approaches to investment have been driven by the multi-employer master trusts that dominate the auto-enrolment market. But many traditional providers are offering the same familiar products, often geared to wealthier savers with financial advisers. Fallacies that the answer to improving savings rates is generic saver education (paid for by the taxpayer) are commonplace. And many have not been slow to use pensions freedom to guide savers into opaque and expensive retirement income products.
Where do we go from here?
Over the next few weeks we will look at the following elements of the Great Pensions Lottery:
The Employment Lottery. Even with automatic enrolment, not every worker is enrolled into a pension scheme. Some are excluded because they are deemed to be self-employed. Others are judged not to earn enough to be enrolled. There are growing signs that workers in many sectors are being left behind. The amount being saved into a pension is also largely outside of the control of the individual.
The Investment Lottery. Individual defined contribution (DC) has become the dominant pensions model. This requires individuals to shoulder the risk of investing in a pension scheme. In Defined Benefit (DB) schemes, employers effectively bear the costs of short-term shocks with the price shared over the longer term. In DC, however, a failure to generate adequate returns directly hits retirement outcomes. When you start to save and when you stop saving has a massive impact on your standard of living in retirement. We're particularly concerned that marginalised workers are doubly disadvantaged when it comes to investment returns.
The Retirement Lottery. For savers in DC scheme there is no longer a straightforward route to meeting their income needs for a good price and in a way that protects them for living too long. Investment, inflation and longevity risk are increasingly borne by individual savers too as fewer purchase annuities guaranteeing them a lifetime income that pool risk. Many stray down the paths of least resistance, cashing in their pensions or using their existing provider’s expensive and risky retirement product.
Given prevailing savings rates and the policy imperative to avoid people experiencing poverty in retirement, the state pension is going to continue to play a major role in meeting people’s retirement needs. However, there has been an impetus to increase the age at which people can receive the state pension and sometimes calls for the benefit to be means tested.
Finally, we will set out the policy options that could help with the challenges outlined. But throughout we're keen to get your input into the problems we have identified and the possible remedies available.