Pensions – half way to somewhere not too bad

January 14, 2013 by
Filed under: Public policy, The RSA 

Today’s announcement on state pensions is important and welcome.  There will be winners and losers in the short term and the long term, a combination of factors that clearly baffled John Humphries this morning. Whilst various interests will be tempted to focus on the losers I hope they – particularly the Opposition – think twice. There are few areas where the need for cross Party consensus is more important than pension policy.

Beyond the financial calculations, the big plus about the new frameworks is behavioural. Not only will the new system be simpler but also, by removing the means tested pensions credit, it will reduce disincentives to save (although interactions with other entitlements – particularly housing benefit – mean some will remain).

Providing a subsistence safety net for all and making it simpler and more rational to save is half an answer to a sustainable and decent pensions system. But today’s announcement also marks the death knell of the attempt to create a state backed system which would guarantee anything more than basic subsistence.  Many may regret this outcome but it is the inevitable consequence of population ageing and funding pressures, another consequence being the gradual increase in the pension entitlement age.

Most people would like their pension income to be at least half of their working income but at current rates the universal state pension will offer less than a quarter of the average wage. So we need to put money aside for our retirement and, as innumerably surveys have highlighted, we are collectively falling woefully short of saving what is needed to fulfil our aspirations for our income in older age.

This is why the other half of the equation needs to be a series of reforms that improve the value of work-based and private pensions saving. Fortunately, the RSA’s own Tomorrow’s Investor project has highlighted the key points of such a package. They include:

Much greater transparency and efficiency in the charges levied on workplace and private pensions; something to which the Association of British Insurers –promoted in part by RSA research is at last attending

Raising the saving limit allowed in the state backed workplace pensions scheme NEST. This has been strongly recommended by the Work and Pensions Select Committee and is subject to a current DWP consultation

Allowing the development of collective defined benefit pensions schemes  which by sharing risk and providing flexibility could improve pensions yields for individuals by as much as 50%

Pensions minister Steve Webb is to be commended for the way he has methodically and purposively set about his task, today’s announcement should be welcomed and the Coalition should be given every encouragement to take the further steps needed to give us a pension system which, while not generous, is probably as good as it can realistically be.



  • Benjamin

    Maybe also a plan would be to make the idea of working less revolting so that the urge to retire isn’t so strong?

    If we retire later, its cheaper. Perhaps if we follow the new economics forum 21 hour week suggestion, the need to ‘get out’ would seem less urgent.

    Your mental faculties decline considerably when you retire anyway, so best to ‘keep b******* on’ as Churchill said?

  • Dave Boyle

    I’d love to save for my retirement, but until such time as I earn enough, it’s a complete non-starter. I don’t save because the incentives are in the wrong place, or the system disincentivises. I’m primed to behaviourally be up for saving.

    I simply can’t after paying my mortgage (that was interest only, as we couldn’t afford a repayment mortgage, which is my first problem once acquiring disposable income to allow decisions over where to spend spare cash), paying for food, heating etc etc.

    I agree that the population is getting older, and that changes things. But all the stats about savings and pensions also take place in a time when real share of national icome for the majority has declined, propped up property appreciation.

    Any pensions policy then is utterly doomed until such time as the governments acts to enhance the amount the disposable income that people have. That involves the type of choices our political class long ago forswore, sadly.

  • Joe

    As you start to mention, transparency is essential to incentivising pension saving. Currently it is very difficult to view pension savings meaning ‘a pension’ to most people is effectively a tax; money that goes out of their wage without a tangible reward.

    There is a need then to focus, not only on reducing the disincentives to saving for a pension, but demonstrating the incentives themselves.

    Pension savings need to be far more visible. They need to be easier for people to manage. People already see the benefits of a pension, give them the autonomy to improve and they will.

  • Sam Earle

    The other thing is that how can one reasonably expect people to have highly developed norms of futurity (ie long-term-ism) in a broader, pervasive culture of short-termism in political and economic arenas.
    And conversely… I wonder about the value of my ‘pot’ when/if I retire. I fully expect that, in 30, 40, 50 years… when I’m at my most vulnerable, the worst of climate nightmares may be fully realised.
    I’d also say, because this seems to be regretfully absent from mainstream pension debate, that I would rather not have a pension (or not in the formal) sense, if it involves investing in less than sustainable or unethical funds.

  • Robert Burns

    Matthew and others,

    I can remember when private pension provision was first being sold as an alternative to state provision (early 1980’s).

    Well we can all see how that worked out.

    Then we were being sold the idea that the state system could ‘find a way’ of providing pensions above subsistence level.

    Now part of the truth is out.

    The economy that the common UK citizen/subject can access is shrinking and likely to go on shrinking.

    This means ever fewer profits from the stock exchange system for redistribution and therefore reduced tax revenues available for social expenditure programs like state pensions.

    Add to the mix that the majority are sliding into subsistence remuneration for work (and can’t save anyway) and the future looks very bleak.

    Malignant property price inflation supporting the debt it is supposed to underwrite bears a lot of the blame for many of our economic woes.

    This is the black hole into which much of otherwise disposable income(s) are falling.

    The economic and social worst is yet to be revealed.

  • Graham Rawlinson

    I think Robert is providing a much needed reality check. Another ‘save for the future’ is just not going to work for the vast majority of people. Apart from the practicality as Robert and others suggest, how on earth could anyone saw when accommodation steals most of most people’s income from most of their lives, apart from that there is the simple issue of why would anyone in their 20’s or 30’s think that whatever they save will be safe some 50 or 60 or even 70 years later? 70 years places us in a potentially disastrous climate change scenario. Many other major change scenarios are possible, do we really think we can trust our ‘investors’ to take all the right decisions and also not steal our money again?
    Surely the only solution is a truly new economics, based on a collaborative economy, localised as needed, where work is valued outside of the monetary system, where paid work is various in hours and type throughout people’s lives, how about we look at things like the ‘Post Growth Institute’ a surer future than one based on based on some kind of government system. I don’t trust politicians, bakers, insurance agents/actuaries nor financial advisors and more, and I am an oldie, how could I expect younger people to have that trust?

  • Zio Bastone

    Two points.

    ‘[T]he big plus about the new frameworks is behavioural.’  (MT)

    Operant conditioning, as BF Skinner used to call it, strikes me as undemocratic. Surely outcomes should be the result of participation in the proper manner and not what a few transient politicians or technicians appear to think ‘we’ ought to want. And that’s before factoring in, as we should, Hirschman’s disparagement of economic fads (earlier pensions fiascos mentioned by Robert Burns et al are an example; we have passed this way before), his dislike of simple rational-actor-input-output models and his sense of economic systems as complex, open and heterogeneous with linkages upstream and down.

    ‘[W]e are collectively falling woefully short of saving what is needed to fulfil our aspirations for our income in older age.’ (MT)

    Yes but despite the implication of ‘collectively’ there are probably several different factors interacting. Here, in no particular order, are a few: the effect of yesterday’s gimcrack social engineering by central governments and corresponding mis-selling by providers; increased precarity in the workplace; the corporate exodus from final salary schemes; arbitrage between the ‘dull’ procedure of building a pension directly and perceived opportunities elsewhere; the effects of the financial crisis (have a look at current annuity rates for confirmation) and Micawberism not just by individuals but by the whole of society, including successive governments.

  • ERGO

    Seems like a pretty mad system as you describe it here.

    In Belgium we have 4 pillars of pension savings.
    1st is the state pension itself (1.100€ approx).
    2nd pillar is your own pension savings which are with a bank in a fund.
    3rd pillar is through your employer, and
    4th pillar is the risky investment in pension funds.

    Although this seems like a good system, we will witness a decrease in the 1st pillar AND 3rd pillar (as our employer costs are huge.)

    In the end, it’s gonna be dificult for me and my children to have a nice transition from high-end income to our smeasly pensions.