What follows is a brief set of notes that sum up some of the main issues discussed at the Social Policy Association’s first Policy Round Table event, held at the London School of Economics on October 29th. The event took the form of a Question Time-style panel comprised of representatives from six leading think tanks providing a 10-minute overview of the current problems facing UK pensions policy and possible future policy options from their perspective. Participants were: Nigel Keohane (Social Market Foundation – SMF); Kristian Niemietz (Institute of Economic Affairs – IEA); Andrew Harrop (Fabian Society – FS); Mel Duffield (Pensions Policy Institute – PPI); Vidhya Alakeson (Resolution Foundation – RF); Ashley Seager (Intergenerational Foundation – IF). The event was chaired by Professor Sir John Hills.
In general, the wide ranging discussion focused on the implications of the pension liberalisation heralded in the 2014 Budget, which is now under way (within this broad rubric, of course, a great many other issues were touched upon). In his opening remarks, John Hills referred to the fact that liberalisation had effectively broken the consensus established by the Turner Commission and noted that the idea that the state should play a role in encouraging a flow of income in retirement had ‘flown out of the window’.
Responses to the new policy focus from the panel were both interesting and various. The Nigel Keohane, for the SMF, recognised that pensions had become ‘deregulated’ at the point of retirement (while remaining heavily regulated during the accumulation phase) and noted that this shift meant that governments could not meet their ‘moral responsibility’ to ensure decent pension outcomes. Triple lock protection is unlikely to affect the situation because governments have underestimated both future fiscal costs and the likely numbers of those who will use up their non-state pension pots. Solutions include encouraging more private saving, equalising tax relief and a radical hike in the state pension age to 70 or 75 – which would allow those of working age more time to plan for retirement.
Kristian Niemietz (IEA) argued that much could be achieved by moving to a fully funded pension system, which in the IEA’s view is best suited to developed economies with low birth rates. Higher pension levels would be secured in this way so long as provider competition was encouraged (to keep prices down). Over time, consumers would develop a requisite degree of financial literacy – and, moreover, pensions issues would be depoliticised, with the power of the ‘grey vote’ being reduced. In some ways, at least, this approach would move policy closer to the original Beveridge position: the state should not crowd out private provision but should co-exist with it – reviving provision for contracting out, NI rebates and so on.
For the Fabian Society, Andrew Harrop questioned the case for fully funded provision, pointing out that the IEA perspective overestimated individuals’ ability to understand and assimilate complex financial information, which could put their savings at risk. Further, a fully funded system would be characterised by inequality, because some individuals would be able to manipulate the system – through better knowledge and/or through having better resources – than others. A better approach would firstly agree an overall aim for a pensions system, which, in the case of the UK, had been set out very well by the turner Commission: the prevention of poverty in old age through the provision of a replacement income in retirement being the key objective. Pension liberalisation has derailed this agreed objective and, in so doing, has focused attention on subsidiary issues like asset accumulation in the context of a worrying ‘decollectivisation’ of risk in relation to pensions saving. This change is all the more unfortunate in view of the fact that progress had been made pre-2014 in encouraging people to work past the official pension age and also in the raising of savings levels through auto-escalation.
Elements of the FS’s concerns were echoed by the Vidhya Alakeson of RF. She highlighted the significance of poverty issues, particularly where the plight of specific populations – for example, older women or the self-employed – are concerned. For women who are well into their working lives, auto-escalation will be inadequate and their position will be compounded in cases where caring responsibilities and/or poor health interrupt their working patterns as they approach retirement. For the self-employed, the difficulty is to ensure that the less well off save towards their pensions. This issue is not widely discussed but is a significant problem, not least because many self employed people struggle on low incomes without sufficient headroom to make meaningful contributions towards their pensions. Taking a wider view of pensions policy, the RF noted that declining real wages and the persistence of low paid work, together with the virtual disappearance of full-time contracts in some sectors, all inhibit saving – this picture being further compounded by the state of the housing market. With rising numbers of people renting for longer periods of time, owner-occupation-based assets will be less available to substitute for pension income as time goes on. The RF could not see how liberalisation could contribute to these complex issues in a positive way.
Mel Duffield, from the PPI, stressed the ways in which liberalisation is likely to have a domino effect – affecting behaviours of savers and contributors alike in ways that are not necessarily conducive to a stable pensions system. In the wake of liberalisation, there is a need for a permanent Pension Commission to oversee the entire area of pensions and ensure stability, particularly in view of potential challenges posed by the recurrence of open-market, shop-around problems for consumers and the probability of inappropriate decisions being made as a result. Looking ahead, consideration needs to be given to options for boosting saving: raising contributions, increasing minimum contributions for high earners, and how to address non-saving among the self-employed are key issues. PPI also pointed to potential difficulties relating to the new flat-rate system – specifically problems associated with phasing it in alongside the phasing out of the old scheme. Pressure to review public service schemes and to close remaining private sector DB provision may also emerge in the wake of the move to the flat-rate scheme.
Ashley Seager (The Intergenerational Foundation) focused primarily on challenges that are likely to face younger generations as a result of what are perceived as the unsustainable costs arising from the pension levels being paid to those now at, or approaching retirement. Official data underestimate the total unfunded liability for state and public service pensions, one likely consequence being that the state pension will have to be means-tested in time to come. There are over 2 million pensioner millionaires in the UK, which, together with over-generous public service pensions and ‘gaming’ by certain groups of state employees, provides an indication of the way in which the system has got out of control. To regain control, Seager argued that a number of policy initiatives need to be pursued, such as tax rates on high public service pensions, the phasing out of DB schemes in the public sector, an annual cap on public sector state spend and the more frequent publication of accurate pension liability data by government.
A wide-ranging debate followed the presentations. Key matters discussed included the merits of a fully funded system and arguments about whether the Chilean system was as successful as some believe. There was some debate here as to whether the sorts of problems (e.g. the patchy contributions records associated with those individuals – including many women – who are not consistently employed) that are frequently ascribed to private pension systems are in fact common to all systems, although there was little agreement over this issue. Concerns about people’s ability to understand complex financial information and the efficacy of extensive regulation were also expressed. Poverty in old age is a major issue – not least because of continuing gender inequalities associated with the persistence of the traditional model of male-oriented industrial employment (40+ years of continued contributions). There is a special need for research into possible gender differences in post-liberalisation pension decision-making: women are likely to have smaller pension pots and may use them for immediate discretionary needs. Beyond gender differences, concern was expressed about the potential problems being stored up for future generations, the plight of the self-employed and the possible advantages of a collective, universal system. However, to say that there was anything like a consensus about the way ahead would be to say too much!