Caitlin Southall, director of SSAS transformation and proposition at WBR Group, looks at the four key proposals from the Institute of Fiscal Studies which, it suggests, can help improve the UK’s pension landscape.
The Institute of Fiscal Studies (IFS) published its Pension Review in early July, launched in London with pensions minister Torsten Bell providing a bullish speech on the need to “finish” pension reforms to provide a platform on which we can work towards providing a better retirement for more people.
Importantly, the IFS suggest that the pension system in the UK does not need a ‘complete overhaul’, but suggests four key proposals which are explored below to allow decreased reliance on state finances and encourage more saving towards retirement.
The state pension
The IFS acknowledges that the current, flat rate state pension is simple to administer, however it is costly. The long debated triple lock is again under discussion in the report, citing the uncertain costs associated with the annual increases and an aging population.
The IFS suggest a ‘four-point guarantee’ to reform the state pension with three core goals: to give more confidence to people with certainty over what state pension they can expect to receive, help to avoid pension poverty, and to use the state pension as a platform on which to privately save for pensions. The proposal is summarised as follows:
- The introduction of a government target for the state pension, which would be a percentage of median full-time earnings. The intention here is that the state pension would mirror average earnings increases.
- The state pension would continue to increase at a minimum amount that is in line with inflation annually.
- There should be no means testing of the state pension.
- The state pension age will continue to rise to reflect longer life expectancy.
The triple lock remains a very expensive solution for state pension increases and with the ongoing fiscal black hole that needs urgent addressing, this does appear to be low hanging fruit for the government to change.
Private pension saving
We have a longstanding issue in the UK in respect of people not saving sufficiently for their retirement. The IFS report acknowledge this and suggests that minimum employer contributions are extended to ‘almost all employees’ and should apply from the first pound.
The proposal is that auto enrolment levels should reflect an anticipated ability to save towards retirement. The suggestion is to increase defaults for total pension contributions when people are on average earnings – this will allow the government to protect take-home pay when people are on lower earnings whilst also enabling people to save towards their retirement. It’s a careful and tricky balancing act that the government need to consider here.
Additionally, the IFS state the need to encourage self-employed people to participate in a private pension via Self-Assessment, akin to the auto enrolment rules currently in place for workplace pensions.
Means-tested support
The IFS recommend enhancing universal credit for those qualifying for support in the build up to their later years. They cite the cost of this as being fractional compared with the money that would be saved by increasing the state pension. In addition to universal credit, the IFS recommend an increase in housing benefit for those in the private rental sector, with a view to reducing pension poverty.
Managing retirement incomes
I’ve long been an advocate of pension simplification. The constant flux in terms of pension rules, the lack of a long-term pension strategy and the willingness to utilise pensions for political vote garnering, all contribute to adding layers of confusion on top of complex and intricate rules. The IFS report notes that ‘pensions need to be easier to manage’ and it’s difficult to disagree with this.
The recommendation is to avoid ‘fragmentation’ of small pots and adopt automatic consolidation, helping people on this journey to understand ‘sensible’ ways to access their pensions. The important point made, is that there should be hybrid ways of accessing a pension, that will mitigate the risk of them running out of money in their retirement. The report does reference ‘expensive’ financial advice; however, I think this is misleading, not all financial advice will be costly, and the hope would be that any cost would be offset by financial gain as a result of that advice.
The IFS suggest that in adopting the above recommendations we would increase private pension saving by around £11bn a year, a significant increase against current saving habits. Coupled with targeted advice, pension dashboards and other technological advancements, you would hope that this £11bn would be invested appropriately to facilitate comfortable retirements.
