Pensions after 2012 will be a good deal
We cannot tell yet how Tony Blair’s premiership will be judged by history. But there is one issue that few would mention today that may be seen as much more important in the future. This is the new pensions settlement due to start in 2012.
Frankly I doubt whether he gave the issue that much thought, but his decision to set up the Pensions Commission set in play a process that has led to a new political consensus around a far more progressive pensions system. It is by no means perfect of course, and today’s pensioners have every right to complain that it won’t make much difference for a long time, but it is still undoubtedly progress.
What the Commission did do was cut through a set of government policies that were in the way of new thinking about pensions, especially after the Commission refused its initial terms of reference and insisted on looking at state pension provision as well as private and occupational provision. This meant the Treasury had to shift from seeing means-tested benefits as the only solution to pensioner poverty, and the government as a whole had to overturn new Labour’s reluctance to sanction ‘burdens on business’ – in this case compulsory employer contributions to pensions.
The sheer intellectual fire-power deployed by the three person commission – and its cleverly constructed, near social-partnership membership of former CBI boss Adair Turner; Jeannie Drake from the CWU and well-respected academic John Hills – helped create consensus around its recommendations – and they have now been put into law in two Pensions Acts relatively unchanged, with the new arrangements due to start in 2012.
But while re-indexing the state retirement pension to earnings and a better deal for women from the state pension have been largely uncontroversial (though one hears inevitable rumours of Treasury reluctance to foot the bill) the third plank of the Commission’s Report – auto-enrolment has been more controversial.
The idea is that everyone (other than the very low paid) will be auto-enrolled in a pension provided by their employer. If the employer has a scheme of their own that passes a quality threshold, then staff can be recruited into that. If they don’t, staff will join a new low cost scheme set up by, but independent from, the state. These will be known as personal accounts and are being set up by PADA, the Personal Accounts Delivery Authority – on whose consumer representative committee I sit, I suppose I should disclose.
(I did wage a one person campaign to get it called the Personal Accounts National Delivery Authority, so it would be Panda and the new pensions could be called pandas – but perhaps not surprisingly, I failed).
Personal accounts (and almost certainly the minimum employer scheme that will qualify for auto-enrolment) will receive a four per cent contribution from the employee, three per cent from the employer and one per cent from the government in the form of tax relief. Membership is not compulsory – people can opt-out, but the onus is on the individual to do so.
Auto-enrolment has proved the most controversial element. It might be expected that employer groups would be the most opposed as these compulsory contributions are undoubtedly a cost. But employer groups have accepted this in relatively good grace – and indeed the Engineering Employers Federation were early advocates, recognising that good employers were being undercut by the non-pension providers.
Instead the criticism has been that auto-enrolment will not make some people better off as what they gain from having a modest pension built up from a eight per cent contribution will be more than offset by what they lose from means tested benefits.
This is a real issue and cannot be dismissed. However I do bridle at the word mis-selling that is sometimes applied. Mis-selling is what some – indeed many – pensions companies did when they persuaded people to opt-out of good salary related pensions into risky personal pensions. Advisers knowingly sold pensions that they knew were worse than the ones people had already. It cost the industry £13.5 billion to put right.
The issue here is completely different. The risk with auto-enrolment is that some people may be worse off because they might lose out from the impact of a pension whose value we cannot know (because no-one can predict either investment performance or their own future earnings) on a future means-tested benefits system (which again of course we cannot know today).
But while this is not mis-selling, it does not mean it is not an issue. If it were clear that a particular group – such as older women working part-time who were likely to rent in retirement – would probably be worse off, then perhaps they should not be auto-enrolled, or at least advised to opt-out. If it looked like a significant proportion of the workforce would lose out then perhaps it would be time for a return to the drawing board. And even rumours and inaccurate press reporting that losing out was likely – or even possible – could persuade many to wrongly opt-out and thus threaten the new settlement.
Similarly if there were policies that could reduce this risk – perhaps through changes to the benefit system – then it is right to identify and cost them.
Yesterday the DWP published an extremely thorough piece of research on this (big pdf). It uses some sophisticated modelling processes based on the experience of real people and some case studies to investigate what the real impact of means-tested benefits will be on returns from personal accounts and other pensions with the same contribution levels.
The headline news is good, with some disappointments in the small print.
What is important is that it looks like the vast bulk of people will be better of in retirement if they are auto-enrolled (the report says 95 per cent) and that a majority will get more than two pounds back for every one pound they save.
This is undoubted good news – and as the TUC said in its official release should close down the mis-selling debate.
There are two other conclusions which make slightly more uncomfortable reading:
- There are no obvious demographic groups that are at high risk of losing out. While some factors such as renting in retirement (because of the effect of housing benefit) make it more likely that you will lose out (or at least not do as well as others), you are still more likely to gain. In some ways this is good news, but if there were a neater relationship then it would make it easier for people to decide whether they should opt-out.
- None of the policy instruments suggested as ways of reducing the impact of means-testing made a big difference. Most helped some, but perversely, also hindered others. No doubt the government is pleased at this as it makes it easier to head off calls for such changes with their accompanying price tag. But it would have been better if an affordable tweak to something like benefit taper rates or the trivial commutation limit emerged as an important tool. Trivial commutation is horrible pensions jargon for allowing people with relatively small pensions savings pots to take it all as a lump sum when they retire, rather than having to turn it into a pension through an annuity.
But on balance this report is good news for those who have backed auto-enrolment. And it is worth stressing that this is not just about personal accounts, but auto-enrolment into any pension. Many employer sponsored pensions will probably be no more generous for at least some members as the minimum requirements for personal accounts – though probably with higher charges.
However the report does need to be handled with some care. Any work like this has to be based on a series of assumptions, basically that the world will continue to behave in the same way that it has in the past. But I don’t think even those who have criticised the report today are suggesting that the assumptions are fiddled or unrealistic, but as the estimable Pensions Policy Institute say:
The Government’s conclusion that most people can expect to be better off in retirement by saving, with the majority getting back more than double what they save needs careful interpretation. This finding is based on a specific set of assumptions which may, or may not, transpire in the real world.”
Ministers have to be careful – as Nigel Waterson MP, the long-serving Conservative shadow minister has said – about over-selling the figures in the report. There are no guarantees here.
Nor should this close down the debate. It is disappointing that the specific policy measures that the TUC and other consumer groups suggested don’t have the effects that we hoped for in reducing the impact of means testing. But perhaps there are others. Increasing either the state retirement pension or the employer contribution would make an immediate difference for example – though neither are likely to find favour with ministers. More research using these models would be good.
Yet there can be no magic bullet that completely guarantees that anyone will get a return from a pension based on investment returns. After saving all your life, you can still die shortly after retirement and lose the lot to take one extreme. Arguing that auto-enrolment can only proceed if it guarantees a return for everyone has always been unrealistic – and is not true today as many of the means-testing effects can have the same, or worse impact, on a private or occupational pension.
What is required is as much confidence as possible that a big majority will gain, that no easily identifiable group is wrongly advised to join and that information explaining how the scheme works and the (slight) risks involved is available. Even if the report’s assumptions turn out to be on the optimistic side, there is still more than enough here to vindicate auto-enrolment – after all nudge is flavour of the month.