Out-Law News 3 min. read

Independent pensions policy needed to tackle economic and demographic challenges, says think-tank


The UK needs a new pension policy body which is independent of the government if it is to properly address the growing economic and demographic threats to secure retirement incomes for the country's aging population, according to a new report.

The proposed Pension Commission should be set up as soon as possible after the general election in May and report directly to the government, according to researchers at the International Longevity Centre-UK (ILC-UK). However, it should not produce any formal policy proposals until 2017 at the earliest in order to allow upcoming pension reforms to "bed in", according to the report.

Pensions expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com, said that many in the pensions industry would "strongly support" the idea, as one that could "bring a period of stability" to UK pension regulation.

"The central challenge in defined contribution pensions is to encourage people to pay higher contributions," he said. "To do that, they need confidence in the system – and it falls to employers and pension providers to build up that sense of confidence. Their task will be much easier if they can have an extended period of planning without further change."

"This report is bold in its suggestions, particularly around defining target outcomes and developing a way of monitoring those. I would have more faith that these will be driven by innovation in the industry. But there is also an important focus on what is practical, such as combining the work of the commission with the planned 2017 review of auto-enrolment. That's what the pensions industry now needs - a focus on what will work," he said.

In 2002, the UK government appointed former FSA chair Adair Turner to lead a Pensions Commission tasked with reviewing the country's existing regime for private pensions and long-term savings. Published in 2005, the group's final report made a number of policy recommendations that have been taken forward by the government over the past five years including raising the state pension age, automatically enrolling private sector workers into occupational pension schemes and encouraging people to work longer.

However, ILC-UK said that a combination of economic and demographic factors had led to a "new world of constant policy change coupled with an economic environment which is far from conducive to growing long-term savings". At the same time, rising life expectancy was putting pressure on both age-related government spending and on pension funds themselves, which had to pay out over increasingly extended periods.

In order to address this, the report recommended a new pensions commission able to gather evidence and develop "widespread consensus" on future policy changes over the same extended time period as the Turner Commission. This group should be set up with cross-party support and be headed by academic, charity sector, industry and employee experts; and should report to the work and pensions secretary, chancellor and prime minister to give its findings "sufficient weight politically", the report said.

The report found that a "relentless march" of new pensions policy had created considerable uncertainty in the market, compounded by "the perfect storm of stagnant real income growth and low investment returns". The report said that some of these developments, including public sector pension reforms and automatic enrolment, had been "carefully thought through"; but that other developments had not been consulted on or developed to the same extent before being introduced.

"Sudden and deep changes to the pensions landscape inevitably make it harder to plan for the future, as everyone comes to terms with the new rules of the game," the report said. "This problem is exacerbated when there are a number of big changes taking place simultaneously."

"It is, however, undoubtedly the case that some of the reforms over the last five few years should help achieve better outcomes in retirement. Auto-enrolment in particular should ensure that people have at least some private long-term savings which they can use to generate an income in later life. However as this report shows, contribution rates may have to rise significantly in order to ensure employees secure pension pots of sufficient size to deliver an adequate income in retirement. And, as a result of the new pension freedoms, people could decide to 'blow' their pension pot at the point of retirement, losing out on the potential value of an income stream over the remainder of their lifetime," the report said.

The average length of time spent in retirement has increased significantly over the past 30 years, with women now needing to fund around 26 years in retirement and men now needing to fund around 21 years, according to the report. However, ILC-UK projections suggested that unless the amount contributed to pensions by both employees and employers rose, less than half of average earners would be able to secure themselves enough income in retirement through automatic enrolment alone.

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