There are major changes happening to our pensions, many of which workers are ill equipped to face, and policy is not keeping pace with the challenges ahead.
Today, I was at the TUC pensions conference. The pensions minister, Ros Altmann, gave an overview of government pension policy including auto enrolment, pension flexibilities, potential changes to tax relief and the impact on Defined Benefit schemes.
Auto enrolment opt out rates are very low at only 10% and this has undoubtably been a success. It's too early to be sure how successful in Scotland as a number of big employers with quality schemes have deferred their start date. The big challenge is that only 10% of employers have started a pension scheme - 1.8m employers have yet to start. Small employers are a particular problem as they have less capacity. We should also be concerned about the quality of some schemes and many employers are not choosing a tax efficient scheme. Keeping the trigger at £10,000 is a help, but still discriminatory against part-time women workers. The minister accepted the need to strengthen consumer protection, particularly when the secondary annuity market kicks in.
The Minister argued freedom not to buy an annuity was a positive move, emphasising unbiased guidance from Pension Wise. There were plenty of sceptics in the audience on quality of advice available and £millions flooding out of pensions as a result. Is a 45 minute interview really adequate for such a risky decision? This will all create huge long term problems for a short term gain to the Treasury.
She also recognised the challenges facing Defined Benefit schemes, not least because of the end of contracting out this April - another cash cow for the Treasury at the expense of quality pension provision. The volatile investment market is another challenge and how pension funds respond with new risk models. Sadly, very few answers from the minister on this one.
Otto Thoresen from NEST pointed out the challenges for people having to make complex decisions about what to do with their pension pot. You need to be an investment manager, actuary and have an all seeing crystal ball! NEST is seeking to provide an option that provides flexibility, but retains a default pathway.
Gregg McClymont, former shadow pensions minister, now at Aberdeen Asset Management, described government policy as changing savers into investors. For those in DC schemes they are no longer pension savers, they are pension investors. He also emphasised the skills people need to make informed decisions as being Nostradamus and Galileo merged. Most people will need a lot of help to make the right decisions.
David Pitt-Watson from the London Business School questioned how someone who pays into a DC scheme all their working life can be assured that they will have a sustainable income in retirement. They want trusted providers and strong consumer protection. They also want a simple system to achieve a predictable income for life. DB schemes provided that predictability, but DC schemes with annuities suffered from low interest rates and excessive profits. This matters because the rich don't need to worry, but the poor will run out of money - they need large scale collective provision for DC schemes that shares risk. Experience elsewhere in Europe shows that this could deliver between 30% and 60% higher returns. Government is failing to deliver the framework for this.
The discussion focused on the weakness of market systems. What people really need is a better state pension scheme, rather than a market they don't understand run by providers who have a track record of ripping them off. We should also remember that the move to DC is also driven by employers wanting to cut costs and transfer risk to workers.
Owen Smith MP the Shadow Secretary of State for Work and Pensions said we need a much more robust assessment of pension reforms, particularly for those with small pension pots. He argued that government has been gambling with future pension provision. Discussion has become muted about the impact major demographic changes, growing household debt, falling saving ratios, declining wages and job insecurity all have for pensions. Women pensioners are facing particular discrimination in occupational and state pension changes. Government is guilty of misselling state pension changes, something the current government pensions minister said before taking up her current post.
He concluded with the words of Lloyd George when introducing the first state pension scheme a century ago. He described pensions as "The fruit of security for our society". A good quote for today!
The afternoon panel session took a closer look at auto-enrolment. Speakers emphasised the success of the policy, as the PPI speaker put it, 'inertia is a powerful force'. Although with only the big employers, the ACA speaker said, 'that is the easy bit'. However, it has been less effective in addressing pension disadvantage, particularly for women, the low paid and those in ethnic minorities.
Future challenges include the increase in employee minimum contributions and whatever the Chancellor decides to do with tax relief in the Budget. The ACA argued that there is a need to gradually increase contributions up to around 16% - less than that is not going to provide meaningful levels of pension income. The CBI speaker predictably urged caution on this, referring to a range of employer costs in addition to pensions. Others questioned if this would have a negative impact on wage growth.
In summary, the theme of the conference for me was that pension reform is moving away from the traditional characteristics of a pension. Treating pension pots as investments rather than savings, places a huge risk burden on the individuals who are least able to respond. That places even more control in the hands of market players who have a very poor track record, particularly on costs. When coupled with demographic and workforce changes, pensions face real challenges. Government cannot abstain from this because the taxpayer will have to pick up the pieces from market failure.