A] Prelude*
The pensions landscape is complex and unsustainable in its current form due to i.e. the effect of the financial markets and increasing longevity.
A recent report proposes an interesting new vision for a simpler, fairer and more sustainable pensions landscape, incorporating the three pillars of State Pension, workplace provision and personal provision into a holistic framework.
We will now mention the most relevant aspects of the report. For the complete report: https://www.smf.co.uk/wp-content/uploads/2024/06/Pensions-a-vision-for-the-future-June-2024.pdf
* For more detailed and general information about UK retirement, feel free to visit our dedicated webpages: https://expatpensionholland.nl/uk-expat-pensions
B] Structure
The paper considers both preretirement saving and the taking of post-retirement income.
The focus is on defined contribution (DC) pensions; private sector defined benefit (DB) is withering naturally, and the politically toxic arena of public sector pensions is ducked.
Saving incentives, risk sharing, and addressing the proliferation of small (and lost) pots (the existing stock and, separately, the ongoing flow) are discussed in detail, along with the importance of a dashboard with utility.
The paper assimilates some of the actionable proposals made in more than 40 policy papers written over the last 14 years. More detail is provided in individual papers; where relevant, these are referenced in footnotes.
C] Proposed architecture: 4 key components
(1) A larger, but later, State Pension (“Senior Citizen’s Pension”), supplemented by Income Support (being replaced by Universal Credit by end-2024) extended beyond State Pension Age (SPA).
(2) “Auto-protection” for DC pot decumulation, with two distinct components, both introduced by default (each with the right to opt out):
i. “auto-drawdown” over a finite 15 year period (60 to 75), in the form of an income drawdown default of between 4% and 6% of pot assets per annum, dependent upon pot size, paid weekly or monthly.
ii. “auto-annuitisation” of residual pots, at the age of 75. This would facilitate the collective hedging of individuals’ exposure to the unquantifiable risks of longevity. It would also remove later-life exposure to investment markets risks and, through indexation, cost of living inflation.
(3) Bonuses, not tax relief, paid on all contributions to pension pots.
(4) An enhanced automatic enrolment (AE) framework, to broaden participation.
Members of workplace pension schemes should be given the right to choose the pension scheme into which their employee and employer contributions are paid (“member choice”), subject to the recipient pot meeting AE’s qualifying criteria.
In addition, two new AE-eligible ISAs are proposed, a Workplace ISA and a Self-employed ISA. Alternatively, the Lifetime ISA could be brought into the AE framework, enhanced to provide the same capabilities as the two proposed new ISAs.
D] Destination; Senior Citizen’s Pension alongside one pot for life
In the 2023 Autumn Statement, the Chancellor announced a call for evidence on a lifetime provider model for DC pension schemes.
Given that the purpose of consolidation is to create fewer, larger pots, the logical policy destination is ultimately a system in which individuals would have a single pension pot at one provider, for life.
They would of course be entitled to move it to a different provider, should they so wish (and pot mobility would help keep the market competitive). The exercise of “member choice” would provide a mechanism to help achieve this.
In addition, because member choice is focused on arresting the ongoing flow of new pots, it would neatly complement the Government’s proposed multiple default consolidator model to reduce the existing stock of small, deferred pots.
Together, these two initiatives would dramatically simplify the pensions market and boost engagement with pensions.
In addition, they would heighten provider competition for pots, thereby improving value for money for savers. Meanwhile, the distinction between DC work-derived and personal pension savings continues to blur; a single (pension) pot for life looks inevitable, facilitated by common sense and digital capability.
But why stop at pensions? For millions of people, ISAs are an increasingly significant source of retirement income. Once today’s five ISAs are pulled together into a Universal ISA, the pensions and ISA regimes should be harmonized within a single bonus-fuelled framework. Consumer-centric simplicity to the fore.
E] Guiding principles
- The pension system should:
A] be designed to ensure a dignified retirement for all;
B] embrace accountability, fairness, simplicity, sustainability and transparency (not least to ease the communication challenges). - When reviewing the state, workplace and private sources of retirement income, they should be considered as a single coherent framework. Policy should be made systematically, not piecemeal.
- State provision should be long-term financially sustainable, reflecting the costs associated with the rise in life expectancy and the deleterious economic consequences of an ageing population.
- The state is best placed to absorb life expectancy tail risk (particularly given the decline in voluntary annuitization).
- Providers of private and workplace retirement saving products should be consumer-focused; their customers’ interests should not be subordinate to the industry’s.
- Personalization encourages engagement with saving, and hence awareness about the pension system. Workplace-derived savings should be considered as an extension of private provision, they should be portable and as personal as a bank account (thereby reinforcing automatic enrolment).
- Treasury-funded saving incentives should be structured progressively to maximize their effectiveness. Today’s tax relief arrangement is regressive.
- Defaults work; they should be employed in the decumulation phase to facilitate a more collective approach to post-retirement risk sharing.
- Pensions’ unjust structural prejudices against the low paid should be rectified.
- The paucity of retirement saving by the self-employed can no longer be ignored.
- The role of ISAs in the retirement saving arena should be formalized, given that they are now widely considered to be a core part of retirement savings.
F] What will the future bring?
We appreciate the critical and people focused approach of the paper. Due to the fact that retirement is about legal/tax/actuarial/financial/product/personal aspects, it remains complex. Stating otherwise is not helping the cause, but giving a critical view to the current system indeed adds value!