How to build a fair, resilient and sustainable pension system which gives people of all generations and communities a decent standard of living in retirement is one of the key public policy questions we face as a society.
The challenge is that it can often be difficult to carve out political airtime to have these pressing debates as short and medium-term priorities occupy the immediate space – a fact which has been reinforced by the pandemic.
Compounding this is the difficulty of encouraging the wider public to engage with a future which feels decades away and can be shrouded in complex language like life time allowances, charge caps and indexation; terms that naturally switch people off.
As politicians, it is our responsibility to find ways to both encourage people to engage with their future in retirement, while also providing solid default options so everyone has a minimum standard of living when they stop working in older age.
The Labour Government will design an ambitious agenda to deliver that long-term, but in the immediate term, there are some existing policy initiatives which could deliver strong results with the right momentum behind them. We will look at three of those in detail, below.
The first is the Pensions Dashboard which will help those with the capacity and will to take control of their own retirement planning like never before, bringing transparency and tangibility to something that can often seem like a piece of incomprehensible, distant administration. This is why it is so important that industry and government can cooperate to deliver an effective and usable product in a reasonable time frame.
At the most basic level, information on when an individual will qualify for their state pension is critical so we can prevent confusion and opacity over retirement ages from ever being repeated. But it can offer so much more than this. For example, by providing accessible and clear fee information, it could improve competition and transparency. Dashboards could be an important tool in the fight against scams by giving individuals access to their own data and information through channels they control.
But this will only be the case as long as the right safeguards are in place to protect consumers. The last outcome we want is for people to make bad choices, prompted, for example, by market disruptions or unscrupulous operators until they are more accustomed to this access. As the Government has resisted efforts to keep commercial transactions off the dashboard, we should think about the educational initiatives that could accompany its launch instead, and what role Pension Wise could play.
The dashboard also provides an option to tackle the problem of small pots. The Pensions and Lifetime Savings Association (PLSA) estimates that, without intervention, there could be as many as 27 million deferred pension pots in existence by 2035. This only contributes to complexity and confusion, hindering proper retirement planning and putting these small forgotten pots at risk of being eroded by charges. By showing people what pots they own in one place, it gives them the option to consolidate where it makes sense, and helps them to understand what assets they have and where they are invested.
One of the drivers behind this increasing accumulation of pots is down to the enormously positive contribution of auto-enrolment; the second policy which we believe has great potential to continue transforming retirement prospects. Auto-enrolment has been a huge success in helping people to begin saving for their future by default. According to the House of Commons Library, it is thanks to auto-
enrolment that there are 22.4 million people paying into defined contribution occupational schemes in Britain, as opposed to 2.1 million in 2011; a ten-fold increase. We can learn from international examples of how autoenrollment can be made even better, such as step-up programmes and employer matching.
However, we must exercise caution in viewing auto-escalation as a panacea for meeting anticipated shortfalls in later life. Affordability of contributions is key, especially given the unprecedented pressure faced by the younger generation in the cost of living (particularly housing), wage stagnation and tuition fees. It is an important tool, but it does not exist in isolation of other pressures and that is a wider conversation policymakers need to have.
Now that auto-enrolment is maturing, we should consider how it can be adapted to reflect the nuances and realities of a diverse workforce. This includes making sure it can work for those in low-paid jobs or with fragmented employment which means they do not end up qualifying for contributions.
Record numbers of people are now turning to self-employment and we have to find new models that will accommodate different ways of working so they don’t end up without any provision. The thousands of people contributing to the National Employment Savings Trust (NEST) in this category show the appetite is there. More widely, we should also be making the most of NEST, which has been highly effective at using economies of scale to keep costs lower and tackles the small pots problem by connecting the pot to the member, not the employer.
Thirdly, and finally, we see an important role for pension funds in transforming the environmental impact of our economy, particularly with the UN Climate Change Conference of the Parties (COP26) coming to the UK later this year.
Pension funds are responsible for trillions of pounds of investment in the UK every year and there are many asset managers who are ready and eager to step up and play their part in tackling climate change. The evidence shows scheme members themselves want their funds to start taking this seriously. Aviva’s recent research showed that 59% of people think it’s important that pension funds become net zero by 2050.
Beyond that, the investment case makes this the right thing to do by members. The Department of Work and Pensions (DWP) themselves acknowledge that considering the financial impacts of climate change is consistent with fiduciary duty. And leading pension schemes and investors are already taking action. It is important not to compromise trustee independence, but large schemes should have to set a strategy which is consistent with our climate objectives.
With the heft of the UK’s pension funds behind us, we can make the UK a true world leader in this field. What’s more, it will help further the goal of connecting scheme members to where their assets are invested, encouraging engagement with how that impacts society and the economy.
If momentum can be put behind these three policy objectives, there is real potential to deliver positive and immediate impact in improving people’s retirement prospects today. Longer-term, we, as politicians, have a duty to carve out space to talk about the bigger challenges and help people of all ages engage with their future plans. Labour plans to work alongside the sector to do just that.
This article was featured in Pensions Aspects magazine July/Aug edition.
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