Your new future
Britain’s pension system is in the midst of its most thorough-going period of reform for decades with a move to a universal flat-rate state pension, the introduction of automatic enrolment into the National Employment Savings Trust (Nest) workplace scheme and radical reform of the rules governing how those reaching retirement may use their accumulated savings.
Together, these and other reforms have opened a national debate on the future that faces millions of British savers, ranging from the availability and quality of financial advice to the age at which future pensioners should expect to retire. To debate the issues that these radical changes are bringing to the fore Prospect joined with Aberdeen Asset Management and Legal & General to host a wide-ranging discussion that brought together experts including public policy analysts, consumer advocates, politicians, academics and professionals from the financial services industry.
Although the future of pensions in the UK is hard to discern thanks to the notoriously complex rules that govern the system and the constant stream of changes that successive administrations bring forward, certain basic issues are clear. Among these is that thanks to increasing average life expectancy, we are going to have to work longer, save more and retire later than previous generations. The government has acknowledged this through the staged increases in the state retirement age that are now in train, although Conservative peer Lord Vinson argued ministers had been far too timid in pressing ahead with these changes.
David Sinclair, Director of the International Longevity Centre, pointed out that even though the number of working people over 65 is rising quickly, it has yet to make any impact on the historical trends in this country. “A hundred years ago seven in 10 men were working at 65; it’s now one in 10, so despite the huge growth recently we’re a long way behind.”
Equally, there are clear grounds for concern over the sustainability even of the reformed state pension, said Henry Tapper of First Actuarial. He argued that the most recent five-yearly report by the Government Actuary’s Department suggested that serious challenges would resurface a few years from now. “Even if we move along the path of increasing retirement ages the scheme will have to have either higher contributions or lower benefits from around 2020 because otherwise the National Insurance Fund will go bust,” he said. “At the moment I think we’re living a little bit in cloud cuckoo land.”
Questions in this area would inevitably increase pressure to curb the tax relief available to pension savers, warned Nigel Mills MP, a Conservative member of the Work and Pensions Select Committee. If the changes to the state pension had done enough to ensure that people would not fall into poverty after they retired, was there any need to carry on spending billions more in tax subsidies to encourage saving, he asked. “But if we think that state pension is too low, shouldn’t we just spend the money increasing it as a better way to target taxpayers’ money?” He forecast that tax relief on pension contributions would come under scrutiny again after the next election.
Just a month before that election, however, the changes announced in this year’s Budget will come into effect, notably the new freedom for those retiring to decide how to take their pension savings without converting them into an annuity. This will radically alter the range of options available to the next generation of pensioners and is going to throw the spotlight on to the advice and guidance that will be available to those reaching retirement, according to Teresa Fritz of the Financial Services Consumer Panel. Many people already found the market too complex, she said, when the only option for most was to buy an annuity. Once other avenues opened up, that problem would be much worse. This complexity would be compounded, she believed, by confusion about whether they were receiving formal, regulated “advice” or much more basic “guidance”, particularly from online product providers. “Our big worry is that those sites will continue to grow and that people will now be able to buy even more complex products with what looks to them like advice but isn’t advice,” she said.
The risk of poorly-informed consumers making damaging decisions when they come to access their retirement savings was also highlighted by Ben Stafford, Head of Public Affairs at annuity provider Just Retirement. Like other panellists, he argued for a “second line of defence” when consumers make decisions about how to use their pension funds to head off the risk of poor outcomes. The process should require that before any sale product providers must first establish whether the retiree has taken any advice or guidance, he said. It should then force providers to check that the proposed course of action will not have a negative impact on the customer’s tax and benefits situation and that their state of health and the needs of any partner or dependents have been taken into account.
Probably the greatest challenge facing pensioners and those saving for retirement is the risk that their money will run out. For all their unpopularity, annuities offered insurance against this risk and enabling future pensioners to enjoy peace of mind on this topic was essential, many panellists argued.
For that reason, recent developments in Australia, as explained by James Kelly, the Australian Treasury Representative for Europe, offer important pointers to the likely direction of travel in the UK. Australia has had a compulsory system of workplace pensions for more than 20 years, based on fixed minimum contributions by both employers and individuals. This, Kelly explained, was now resulting in people on relatively modest incomes reaching retirement with significant pension savings. However, the recently completed Murray Review of Australian financial services had identified the problem that although these people had built up worthwhile funds, there was automatic way to provide them with the longevity insurance that an annuity would offer.
As a result, the review had recommended that a default option should be put in place at retirement such that, for example, 70 per cent of their retirement savings would stay invested but be used to provide them with an immediate income and the remaining 30 per cent would be used to purchase a deferred lifetime annuity that would provide a guaranteed income for the rest of their life once they reached a pre-determined age. The tendency of most savers to follow the default options they were offered suggested that this two-stage retirement package might be able to ensure that most of those retiring ended up with longevity insurance that would protect them from running out of money.
In the UK context, Nest is the closest parallel to Australia’s workplace pension funds although it has been in operation for a much shorter period. Will Sandbrook, Nest’s Head of Strategy, argued that Australia’s experience as it moved to a two-stage default option for scheme members reaching retirement would hold important lessons for Britain as Nest matured in the decades ahead and there was a steady increase in the number of people retiring with most of their savings in defined contribution schemes (where the individual’s pension value depends on investment performance rather than the level of their salary while in work).
Amid a complex and changing landscape for pensions, Nest’s success in persuading the great majority of those eligible to save for their retirement with the aid of their employer was seen by the panel as one of the clear bright spots. “Hats off to Britain for the employers embracing auto-enrolment,” said Henry Tapper. “Let’s not discount how far ahead of the curve we are in improving our savings ratio in this small area. This is where hope springs.”