How to fix pensions and boost economic growth
As the Chancellor made clear in her first speech, the new UK government’s defining mission will be to turn Securonomics from a pre-election soundbite into a set of policies to boost economic growth. Plenty of attention has already been paid to increasing business investment, reducing friction in the UK’s trading relationship with Europe, and reforming the planning system. However, it is in the area of pensions - and specifically the evolution of workplace pensions - where much of the more secure element of Securonomics will be determined. Financial security at a household level underpins national economic growth. Supporting greater household financial security today, and for their future, would contribute positively to social mobility, health, and productivity, as well as leading to more money invested including potentially in productive UK assets. We argue that the UK pension system provides an ideal mechanism to do just that
With these benefits in mind, it was encouraging that in the Labour Party manifesto there was a commitment to review the pensions landscape “to consider what further steps are needed to improve pension outcomes”. That looks set to be a broad-ranging review, taking place more than twenty years after the last such review considered whether pensions, both state and private, were fit for purpose. Led by The Pensions Commission, it set in motion the most radical change to UK pension provision for generations. The cornerstone of the Commission’s recommendations – auto-enrolment into workplace pensions - has been one of the most startling public policy successes of recent times. It has directly increased pension membership amongst UK employees from 47% to 79% since 2012. There is no greater illustration, in our view, of the good that evidence-based policy - backed by cross-party support - can achieve. So as new DWP and Treasury ministers get their feet under the table what are the opportunities for evolving auto-enrolment, building from this strong foundation?
Three areas are likely to come into sharp focus for workplace pensions: breadth of provision, depth of provision, and flexibility of provision.
Firstly, breadth. Should more people be brought into auto enrolment? There is already legislation which enables the government to bring younger workers in, and there are calls for an extension to employees earning under £10,000 a year. But consideration should also urgently be given to those who don’t have an employer to do the job of putting in place a pension. One large, and currently excluded group is the four million self-employed people in the UK. Whilst pension participation amongst employed people has risen dramatically under auto enrolment, the opposite is true of the self-employed. Only 14% now contribute to a pension. Most say that they want to save for retirement but struggle to translate this intent into action. Auto-enrolment is, again, likely to provide the answer here. Longer-term saving could be built into the income reporting and tax system that self-employed people systematically engage with. Alternatively, saving defaults could be built into bank accounts or accountancy software. Self-employed people often have variable and uncertain income patterns so ‘sidecar’ approaches – that combine liquid saving alongside pension saving - may meet their needs better than a pension-only solution.
Next, depth. Most workers are now saving for retirement, but are they saving enough? The Pensions Commission always envisaged that minimum contributions would be topped up by voluntary contributions for people to achieve adequate retirement incomes. In practice, those minimums have often proved to be a maximum. We know a lot of people could or should be saving more for their retirement. Existing legislation already allows the government to decide to calculate contributions from the first £1 of pay, rather than above a certain threshold - currently just over £6000. If enacted, this would have the greatest impact on lower earners, both in terms of the benefits but also the cost of additional contributions. There is also a widespread call to increase minimum contributions from their current level of 8% up to 12%, or even 15%. But as many as one in three working-age adults live in families with liquid savings below £1,000, leaving them vulnerable to financial shocks today. For households lacking immediate financial resilience, it’s not clear that the next Pound of savings is always best targeted towards a pension. So whilst we need to find ways to boost some people’s retirement saving, universally raising minimum workplace pension contributions could risk pushing others to save towards a higher income in retirement than they are living on now. And for poorer households this might have consequences, potentially leading to higher opt-out rates, or, if people don’t opt out, higher debt, more arrears or cutting back on essentials. Careful consideration is needed to get the balance right.
Which leads us, lastly, onto flexibility. There are concerns in expanding coverage and raising minimum contributions, but also a huge opportunity here to build some flex into where these contributions might go. Incorporating emergency savings into auto enrolment could be the win-win move that allows overall contributions to rise while mitigating some of the risks of doing so universally and solely into pensions. What if people only saved more for retirement once they had built a good emergency buffer, giving them security and peace of mind today? Nest Insight has explored the effectiveness of opt-out emergency savings programmes in the workplace alongside auto enrolled pensions, working with employers including the Co-op, Bupa, SUEZ, BT and Timpson. These real-world pilots prove that this is a popular and inclusive way to increase financial resilience while also complementing and supporting pension saving. The US has already legislated to allow pension-linked emergency savings. Auto enrolment could provide the foundation for a connected approach to join up shorter- and longer-term saving in one system, to help Britons build true financial security.
Pensions reform needs to be long-sighted – the impacts accrue long after the politicians responsible have left office. As such, it can get pushed down the list of priorities. But embracing this opportunity to build economic security from the ground up, thinking holistically and leaving no one behind, would signal commitment to making long-term decisions to boost inclusive economic growth. A pensions review that lays the foundations for those outcomes would be a job well done.
