In spite of major reforms over the past twenty years, the UK’s long-term savings system lacks coherence and strategic purpose, with different elements of the system working against each other. The government is trying to push through bold reforms, but it is also failing to address significant flaws in the system. A long-term savings commission is needed to address this and forge some kind of a consensus on how we proceed from here. This was the conclusion I reached following a research project I undertook for People’s Partnership late last year.
Major set piece reforms, notably pension simplification, auto-enrolment, the new state pension and pension freedoms have all served to improve different aspects of the UK’s long-term savings. Yet in spite of these reforms, the challenges keep coming. So, in no particular order, here are a few of the challenges to which the next government will have to find answers.
The auto-enrolment consensus is in danger of coming apart. We have millions of workers who are at least now in a private pension, however they probably aren’t saving enough, yet we still haven’t even managed to implement the modest increases recommended by the 2017 review. We’ve done nothing for the millions of self-employed who aren’t saving in a pension and more worrying, the rate of home ownership in retirement is set to fall from 78 per cent to 63 per cent, which will lead to a sharp increase in welfare demand. This means workers will be impoverishing themselves today by making pension contributions, only to find they’re no better off in retirement. This is simply not sustainable.
State spending on pensioners, through the state pension, health care and long-term care is set to absorb a growing share of GDP. This is thanks to an ageing population, a shrinking worker-to-pensioner ratio and the decline in private pension provision through defined benefits schemes. Simply ratcheting up the state pension age is a blunt instrument that is increasingly unfair on those with lower life expectancy. Things will have to change, but since 2017 and the dementia tax debacle it appears our politicians are scared to address this issue. Meanwhile, they all sign up to the triple lock, a necessary remedy which is perhaps outliving its usefulness, for fear of losing the pensioner vote.
There is no coherent policy linking together home ownership, later life care and retirement saving. This is madness. Houses and pensions are by far our two largest private stores of wealth, much of it in the hands of the Baby Boomers and Gen X, yet we’re not having any kind of public conversation around the trade-offs between personal and public resources and liabilities.
Tax relief costs tens of billions of pounds to the exchequer every year. Most of it goes to high earners, to men and to public sector workers, but why is this? Is this a good use of public money? Could the state top up to private pensions be reconfigured so it acts as a more effective incentive? Could it be redirected to boost the savings of those most in need of the help? George Osborne started looking at this question in 2015, leading to the Lifetime Isa, then Brexit happened and any further reform of pension taxation was put back on the shelf.
The government wants to crash together the existing UK pension system into fewer, bigger, better run schemes, investing in the UK economy. It wants to solve the small pots problem and is looking the lifetime provider model to achieve this, as well as creating a small pool of large default consolidators. It also wants to introduce Collective Defined Contribution schemes. These are not small things, they will be disruptive and difficult to deliver, and some will face opposition from the industry. A commission would give the government cover, just as the Turner commission did in 2006, forging a consensus beyond party politics, built on hard evidence and the clear articulation of trade-offs.
For all these reasons, I believe the next government should institute a commission to examine these big strategic issues and offer insights and recommendations on how they could be tackled. The current pensions minister has expressed his support for a commission, just not now, and Labour has already signalled its intention for a review of pensions. I’d like to see whoever forms the next government have the courage and the vision to address these issues. An independent, advisory commission would be the best way to go about it.