House of Lords committee is right to find serious defects in workplace pensions
The House of Lords Select Committee on Public Service and Demographic Change last week published Ready for Ageing?, its report on the challenge that population ageing presents for the UK. The report contained some very tough language on DC pensions, much of which chimes with the TUC’s concerns.
The committee’s main recommendation is that the government must adopt a coherent, joined-up response to population ageing. It wants the current government to publish a white paper on their vision for public services in an ageing society, and for the government elected in 2015 to immediately set up two cross-party commissions, including one on how to work with employers and the pensions industry to improve private pensions, saving and equity release.
Essentially the committee wants the government and society in general to recognise that people must become more self-reliant in terms of retirement income provision – having accepted that the state cannot continue to be the main source of retirement income. This assumption is arguable, but that it leads the committee to conclude that DC pensions are not currently fit for purpose is a positive development.
The key projections included in Ready for Ageing? are that, by 2030, there will 51 per cent more people in England aged 65 or over compared to 2010, and 101 per cent more people aged 85 or over. The King’s Fund’s evidence shows how immediate the repercussions of the growth of the ‘oldest old’ population will be, with 50 per cent more people with three or more long-term health conditions by 2018, compared to 2008.
This is the context in which the committee rightly concludes there are ‘serious defects’ in DC pensions. We need to save more, but ‘saving more is made less likely as the current DC pensions system is not fit for purpose for anyone who is not rich, or who moves in and out of work due to bad health or the need to care for others.’ The report highlights the individualisation of risk inherent in DC provision, as longevity and investments risk shift from employer and employee, that is, those ‘who are least able to bear those risks’.
Yet the report has very few references to the best ways to improve DC outcomes: large-scale provision, good scheme governance, and a more functional annuities market. It recognises that the statutory minimum contribution rate associated with auto-enrolment – 8 per cent – is insufficient, but does not contain concrete proposals on how saving rates could be increased.
The committee is mainly concerned about the lack of certainty over outcomes from DC saving, given that outcomes are based on investment performance and not related to pre-retirement income. One its main recommendations therefore is:
The Committee urges the Government, pensions industry and employers to tackle the lack of certainty in DC pensions and address their serious defects to make it clearer what people can expect to get from their pension as a result of the savings they make.
Alongside making private pensions more flexible for those wishing to retire gradually, this is the report’s main recommendation for pensions policy. It will be music to the ears of the pensions minister, who has identified this as the principal flaw of DC pensions in his ‘defined ambition’ agenda. The committee agrees with the government that introducing stronger guarantees into DC provision is the key to stronger savings incentives. The possibility that guarantees are not value-for-money, and would lead to lower outcomes (albeit more secure) is not explored.
Nor does the report make any reference to pensions tax relief in relation to savings incentives; the benefits of tax relief are currently skewed towards higher earners. Similarly, there is no reference to the government’s recent restriction of the auto-enrolment eligibility rules. The performance of DC pensions is a major concern, but so is the wider policy framework within which workplace pensions operate.
The TUC’s written evidence to the committee (which you can access here – see page 964) focused on the problem of extending working lives. There are very high economic inactivity rates among the group just below state pension age, caused in large part by long-term illness and disability, especially for manual workers. Those just below state pension age who are unemployed, rather than inactive, tend to have been unemployed for a very long time.
Despite this, the Committee appears to have accepted that state pension age should rise faster than the government is currently planning, due to rising healthy life expectancy. Yet the inequalities in the proportion of life spent in good health are staggering: the difference between the local authority areas with the highest and lowest levels of disability-free life expectancy at 65 is 12.1 years for men, and 12.3 years for women.
The response of the TUC’s Ben Moxham to the report, published on the Age Immaterial blog, also argued that age discrimination in employment is a problem we have yet to overcome, especially for older women:
More and more evidence is coming to the fore showing that older women are facing some seriously regressive attitudes out there. A recent survey of UK businesses show that over half of them would prefer to bring back a Default Retirement Age and that almost one-fifth of them still forced workers to retire.
As an excellent report by the International Longevity Centre-UK, published at the end of 2012, demonstrated, the key to meeting the cost of ageing is not simply compelling people to work for longer, but also increasing the employment rate of the current working-age population. The committee is right to highlight the serious challenge presented by population ageing, but we should not forget that the best way to combat this challenge is sustainable economic growth.