There are two big reviews due this year that will shape the future of the pensions landscape for a long time to come.
The first of these is the state pension age review, for which Sir John Cridland is set to submit his report to the Department for Work and Pensions this month. The Government will then examine his findings and the analysis from the Government Actuary’s Department before making recommendations to Parliament about the future profile of state pension age increases.
While the final outcome will be a matter of judgment, there are a number of areas in which the future is pretty clear.
State pension age review
First, we can expect to see the date at which the state pension age rises to 68 brought forward compared with the current plan of phasing in the rise from 67 to 68 between 2044 and 2046. Based on a DWP report published in January, its working assumption is that this timetable will be accelerated by about five years. This means those born after 1973 can expect a pension age of at least 68.
Second, we can expect to see dates for a pension age of 69 for the first time. At present, legislation gives no timetable for going beyond 68 but, if we are genuinely going to be spending two-thirds of our adult life in work and one-third in retirement, this implies a pension age of 69 in the early 1950s. This means anyone under 35 can expect to work until they are at least 69 before they can draw a state pension.
Third, we can also be sure any pension age timetable will be subject to repeated further amendments over time. The Government is obliged by law to review pension ages roughly once per Parliament, and has only promised to finalise an individual’s pension age once they are about 10 years from retirement. Any assumptions about pension age and retirement planning for those under 55 should therefore be regarded as highly provisional.
Automatic enrolment review
The other big review set to have far-reaching consequences for retirement is that of auto-enrolment. At one level, auto-enrolment has been a huge success. By the end of the rollout, almost 10 million people will have started saving into a workplace pension and the fears of mass opt-outs or large-scale non-compliance among small firms appear not to have materialised.
The latest DWP evaluation report shows some impressive increases in pension scheme membership among previously under-represented groups, with a particularly welcome surge in membership among the under 40s. It is to be hoped that the arrival of the Lifetime Isa – a rival product for the under-40s – does not undermine that progress.
That said, much still remains to be done. The consultation highlights three main areas: coverage, engagement and contribution levels.
On the subject of coverage, the initial questions asked include whether the £10,000 earnings trigger is at the right level, whether some groups (perhaps such as seasonal workers) should be excluded and what can be done about the self-employed.
On engagement, the review team has been asked to look at effective communications about workplace pensions and whether there are particular touch points that could be used to help reinforce a sense of ownership of an individual’s pension and planning.
On contributions, the review asks for evidence on what determines an individual’s level of retirement saving, talks about the role of saving outside a workplace pension and asks for comment on the right balance between employer and employee contributions.
These are all worthy topics for discussion and the focus on the shockingly poor pension coverage of the self-employed is most welcome. However, the review is weakest on the single biggest issue for auto-enrolment: how to get people to save more than the proposed 8 per cent minimum after 2019.
The terms of reference of the review say it will simply “strengthen the evidence base” around the appropriate level of contributions but ministers have explicitly said they do not plan to make policy in this area in 2017.
This is a vital opportunity missed. While auto-enrolment has been a huge success it has also taken a very long time from the start of the Pensions Commission in 2002 to the full rollout in 2019. If we step back now and admire the scenery, we risk being stuck at 8 per cent for another generation. If auto-enrolment is to transform the pensions landscape, as it has the power to do, we need to grapple with this issue now.
Steve Webb is director of policy at Royal London