Financial Adviser – Will the Pensions Bill work well?
by Dr. Ros Altmann
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As the new Pensions and Savings Bill makes its way through Parliament, can we finally look forward to an end to our pensions crisis?
Sadly, I don’t think so. Certainly, this legislation could have a significant impact on the pensions landscape, however it is highly unlikely that, as a result of the measures in this Bill, we will see people saving enough to provide themselves with a decent retirement income, nor will it address the inadequacies of either the State or Private pension provision.
So what does this Bill do? Building on reforms set out in the 2007 and 2008 Pensions Acts, in essence, it will implement measures in the Making Automatic Enrolment Work review, including setting out the earnings limits and three month waiting period for auto-enrolment. It also proposes State pension reform including changing the formula for increasing State, public sector (and private) pensions uprating, only requiring annual increases in line with consumer prices index (cpi), rather than the retail prices index (rpi), thus making these pensions potentially much less generous over time – and saving costs for government and employers. The Bill also proposes bringing forward the rise in the State Pension age for men and women to 66 by 2020.
Auto-enrolment is a well-meaning measure, but simply getting people to contribute small amounts to a pension arrangement does not solve the problem of inadequate retirement income. In addition, by automatically enrolling everyone into workplace pensions, the Government runs the risk of future litigation from pensioners who were not given adequate risk warnings about the dangers of our current pension system, in which those claiming Pension Credit (to which around half of pensioners are currently entitled) can lose some or all of their private pension in the means-test.
The problem of inadequate long-term saving is not just about getting people to contribute to a pension scheme. In fact, pensions are not actually a suitable investment for many of those expected to join the National Employment Savings Trust (NEST), which is the default national pension scheme that the Government is establishing for employers who do not wish to use or choose a private sector provider. Low and moderate earners – the target group for NEST – are the most likely to end up on means-testing and, therefore, are the most likely to find that their private pension fund has not benefited them much, or at all.
The ‘big bang’ approach of auto-enrolment should get more people saving in a pension scheme, but that alone is not a solution to our problems. Firstly, those new savers might be better off in an ISA, rather than a pension fund, secondly, no account has been taken of future annuity rate trends and thirdly, pension provision for those already in an employer scheme could end up worse. Existing pension schemes are almost all better than the statutory minimum or NEST requirements. Average employer contributions into money purchase schemes are around six percent of salary – compared to the officially recommended 1 to 3 per cent. Unfortunately, the government, by specifying a low minimum, has already given employers a much lower target to aim at and employer pension contributions have been falling, thus running the risk of making pension provision for many workers worse, not better. I wish employers had been allowed to automatically enrol staff into their existing schemes first, without setting an official minimum contribution level.
The Pensions Bill 2011 still fails to address one of the most fundamental causes of our pensions crisis: the inadequacy, complexity and means-testing of the state pension prevent our state pension from providing a clear and adequate social welfare minimum on which private savings can be safely built.
The best way to tackle pensioner poverty quickly, especially for women, is to pay a decent universal state pension, above the pension credit level. Even if that is paid from age 70 or even 75, at least there will be a particular age beyond which private income will be free from means-testing penalties.
Pension saving cannot quickly reduce pensioner poverty, since pensions take many years to build up. As the demographic time bomb kicks in from 2011, and with millions more ‘baby boomer’ pensioners reaching their 60s over the next ten years or so, automatic enrolment will not address the looming, imminent pensions crisis.
Part of the Government’s answer is to increase the State Pension Age far more quickly than previously proposed. The Bill proposes increasing the state pension age to 66 for both men and women by 2020. Although this will save costs and force people to work longer, it is grossly unfair. Of course equalising retirement age for both men and women makes sense, but hundreds of thousands of women will be unfairly penalised by this provision. These are women born between 1953 and 1955, whose pension age had already been increased in the 1995 Pensions Act, from 60 to around 63 or 64. They had quietly accepted those changes, and set about planning their finances accordingly, in expectation of receiving their state pension at the new higher age.
But, from 2016, these same women are supposed to accept yet another increase in pension age – and not just by a further one year but for many it will be up to another two years’ delay, giving them no time to realistically make up for the loss of thousands of pounds of state pension income they were relying on. As it is so close to their pension age date, many of these women have already retired to care for relatives and planned their finances carefully.
Women are already at a pension disadvantage relative to men, with this generation of women earning less during their working lives; often being barred from joining private pension schemes when they started working; and many having their careers interrupted for child-raising. As mentioned previously, while it is entirely reasonable for the state pension age to be equal for both sexes, these women are not being given enough time to make alternative plans. The rug has been pulled from under them and I believe the Government must think again on this, to alter its timetable for pension age increases.
There is one measure, however, that is going through Parliament at the same time, which can be applauded. The government is scrapping the default retirement age, so employers will be banned from sacking their staff for turning 65. This is simply brilliant news. And it is not before time, with the first of the baby boomer generation turning 65 from this month, and with an unprecedented millions more reaching the milestone over the coming years. Of course, employers will need to adjust to this new reality and judge their workers on their ability and effectiveness in doing their jobs, rather than simply making a decision to ‘retire’ them when they reach a certain age. No-one will be forced to work longer, but many want to and will now find that easier – preferably part-time.
This decision to remove the default retirement age doesn’t only benefit the older generation. All of us will benefit from keeping older workers in the labour force, producing and earning to support the economy and themselves. If they are thrown out of work, they will be forced onto meagre pensions, with less to spend, leading to less job creation for younger workers and economic decline.
The Government deserves much credit for removing the compulsory retirement age, however, the 2011 Pensions Bill does not do enough to fix our broken pensions system. Sadly, without radical and fundamental reform, it will be almost impossible to ensure a sustainable pensions system for the future.