The Hitchhikers Guide to the Galaxy had the words “Don’t Panic” clearly emblazoned on the cover. The second report of the Pensions Commission is not quite so blatant, but does contain a similar message: “… no present crisis of average pensioner incomes…”.
Although not as blatant as “don’t panic” the report, for all its 460 pages, does have the feel of another piecemeal attempt at tackling some of the current problems inherent in our pensions system.
Looking back at the first report of the commission there were three elements which were suggested as providing potential solutions:
- Taxes / NI devoted to pensions must rise
- Savings must increase
- Average retirement ages must rise
On the first and last points, the second report does propose some interesting options in terms of reforming the State scheme and changing attitudes towards viewing retirement as a gradual process rather than a set age. With the exception of the National Pensions Savings System (NPSS), it is on to the second point – encouraging increased savings – where the report fails to deliver the necessary clarity.
In isolation, some of the proposals within the report make a lot of sense in other areas there remain unresolved questions and concerns that need to be addressed quickly – perhaps more quickly than the report itself seems to indicate:
- Simplification – by moving to a flat state pension linked to earnings and removing the current complexity related to means tested benefits and potential disincentives to saving then we should end up with a system which at least people can understand (although the Chancellor may disagree with this sentiment). Add to this measures reduce the complexities for those with interrupted work records and the recommendations start to make a lot of sense.
- Quasi-compulsion – this was always going to be difficult. With any form of direct compulsion an easy target for those wishing to bang the “higher taxation” drum, the “you’re in unless you opt out” is a neat approach for the NPSS. This quasi-compulsion is also strengthened by individuals having clearly defined pension pots – another step in the right direction.
- Increasing retirement age – let’s face it, despite the recent gnashing of teeth by some of the Trades Unions, this is a no brainer. Perhaps the 1908 Old Age Pensions Act had it right all along (setting the original old age pension age at 70).
- For all the good ideas around NPSS, the report recommendations are primarily aimed at the low to middle income groups – an important group without doubt – but the bigger picture does seem to get pushed to one side. The danger of this bias, intended or not, is that like pensions simplification (with benefits seemingly accruing to the higher earners), it does not help overall clarity. Piecemeal approaches to pension planning have been one of the main barriers to public understanding of, and engagement with, pensions over recent years.
- The “don’t panic” message, although caveated – “The problems in our pension system will grow increasingly worse unless a new pensions settlement for the 21st century is now debated, agreed and put in place” – does give the impression that there is scope and time for further discussion – a dangerous, if unintended, output.
- There are a number of areas where the report appears to run out of steam, notably:
- Concerns about the current system of tax reliefs are identified but, with the exception of the NPSS, putting off any recommendation as to how these might be resolved.
- Easing annuity capacity strain. Aside from some general themes about how this may be resolved (which also seems to contradict other messages in the report suggesting that there will be no such capacity strain) there is little substance here to provide the public with confidence that the pension pot which they build up (via NPSS or otherwise) will actually be of any value when they move to the decumulation stage.
- istribution of NPSS. The report seems to indicate reliance on the public sector to run the scheme. There is brief mention of National Savings & Investments (N&SI) becoming involved to some extent. But no real clarity on how distribution might work in practice. Given the recent experience (eg. tax credits system) there must be some doubts about the ability of the public sector to run NPSS properly or efficiently.
Clarity is urgently required across some of the areas which have not been fully addressed by the Commissions Report. If we accept NPSS as the way forward there is still room for significant doubt about the levels of retirement income that this will provide for many, and little new to encourage provision over and above the State scheme and NPSS.
GE Life’s own research backs up the Commissions findings that there is no current crisis. In terms of people retiring today and in the near future, customers are generally confident about levels if income in retirement. The primary driver for this confidence for many is that they have a variety of sources of potential income – state pension scheme, private/company pensions and other investments (including property wealth).
The real danger is that without addressing all the issues in full -for example, the thorny issues of tax relief and converting savings into retirement income effectively – the current doubts of many in terms of the value of pensions saving will remain. The result being that the next generation of retirees approach retirement with considerably less confidence – perpetuating the very concerns about the current system of pension provision failing to deliver adequate results that the Pensions Commission was set up to address.