A summary of plenary 5 at the IFoA Conference (26 to 27 June 2023). The session had the topic of ‘pensions adequacy: a ticking timebomb or ‘keep calm and carry on’?’
The chair Leah Evans introduced the discussion by noting that auto enrolment (AE) is generally seen as a success. But contribution levels are too low: there is concern that many will have inadequate pension savings, and new ideas are needed to address this.
Heidi Karjalainen said the Institute for Fiscal Studies has begun a major project that will investigate important aspects of AE it believes policymakers are neglecting. This review will last for two and a half years and will lead to concrete proposals for policy changes. Among other things, it will cover 3 important issues:
First, the level of minimum contributions. Karjalainen noted that the Turner Commission, which led to the creation of AE, had recommended employee contributions of 15%. Currently only one in 10 employees is paying that much.
Second, expanding access to AE – for example for the self-employed.
Third, addressing the transfer of risk from the employer to individuals in defined contribution (DC) schemes. These risks include poor returns on invested contributions and running out of money in retirement. There is a difficult challenge to explain:
Leah Evans mentioned that the IFoA’s Great Risk Transfer campaign focuses on just these issues.
Hetty Hughes argued that without policy change there will be a significant future shortfall in retirement incomes. She noted that employer contributions in the few remaining open DB schemes averaged 22% in 2019. That’s compared to just 3% to 5% for DC employer contributions.
The age at which people own their homes outright is getting older, so those with outstanding mortgages when they retire will face greater financial demands. Pensions will also be unequal: the gender gap is only projected to narrow by 3% by 2060. One minor move in the right direction is the removal of the ‘lower earnings limit’ from the way AE contributions are calculated. That will increase the contribution rate.
She highlighted the importance of engaging with scheme members and mentioned the ABI’s 2022 Pension Attention campaign in partnership with the Pensions and Lifetime Savings Association.
Chris Curry said AE should be seen in a wider context, including the pension tax system, social care, and housing. A median earner is projected to have a pension pot of £225,000 at retirement. This is barely adequate for those who own their own home, but as Hetty Hughes pointed out, the number of people who will not do so is growing. In Curry’s view, policy changes should prioritise groups with relatively lower pension provision today such as women, the low paid, and those with disabilities.
He suggested that the cost of living crisis should have prompted measures to allow people to access their pension pots at an earlier age. He mentioned that the Pensions Policy Institute has recently published research on the impact of the crisis.
Sir Stephen Timms was concerned that many people are simply unaware that their AE contributions will be inadequate. He said that although increasing minimum contributions isn’t realistic during a cost of living crisis, the government should already be communicating the need for change.
He also emphasised the importance of building consensus, but this is challenging since the government did not support the findings of the Work and Pensions Committee last year. He noted that only 16% of self-employed people are paying into a pension and advocated a version of AE for this group.
Leah Evans asked the panel for views on implementing AE contribution increases and targetting specific groups. Each panellist emphasised different aspects of this.
Heidi Karjalainen advocated a ‘segmental’ approach to take account of groups with different needs. One example is that minimum contributions could be lower for very low earners because the state pension will make up more of their retirement income. Another is to ‘nudge’ members to pay more when they have paid off their mortgages.
Hetty Hughes suggested a flexible system allowing members to adjust contributions up or down as their circumstances change.
Chris Curry believed AE should be simple and easy to understand. Contributions should be calculated from the first £1 of earnings. The ratio of employer to employee contributions should be as high as possible as this will reduce opt-outs. He mentioned NEST’s sidecar concept as a good way to build savings, with a particular focus on women, ethnic minorities, people with disabilities, and those in unstable employment.
Sir Stephen Timms noted that opt-out rates have stayed low during the cost of living crisis. He supports a move towards 12% combined contributions by the 2030s, but he believes it is first vital to achieve a consensus for change.
Leah Evans called for innovative solutions to the adequacy issue. Hetty Hughes responded that areas to focus on should include the dashboard, the advice/guidance boundary, and education. She thought the Consumer Duty would improve communications but cautioned that in general effective member engagement is very challenging.
Sir Stephen Timms talked about the need for legislation to allow workers in the ‘gig economy’ to be auto-enrolled. For the self-employed, one idea is to take pension contributions from increased National Insurance, which would be matched.
There was a question about the role of investment in addressing adequacy. Chris Curry said that although investment is significant, contributions are an even more important factor. Sir Stephen Timms said pension schemes needed more investment freedom, and The Pension Regulator’s requirements for them to buy gilts are too prescriptive.
Panellists acknowledged that the state pension was a significant part of overall adequacy. One question was whether state pension costs could undermine adequacy. Stephen Timms supported increasing state pension in line with earnings.
Chris Curry believed the ‘triple lock’ was unsustainable and commented that policymakers should consider the ultimate purpose of the state pension. Heidi Karjalainen said even with the triple lock, health costs will increase more than the state pension in the long term.
The measurement of adequacy was raised. Sir Stephen Timms said the Pensions and Lifetime Savings Association has done good work on defining this. However, adequacy is a moving target.
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