The cost of living crisis looms over today’s savers. What can the pension industry do now to help? While millions more people are saving in pensions compared to a decade ago, when they retire many will find those pensions inadequate. How can we alter the UK pension system to achieve better pensions?
Good morning everyone and welcome to Liverpool. It’s great to be back and great to see you all again. Our investment and local authority conferences this year had a wonderful atmosphere and I’m sensing more of the same already as we prepare to discuss the big issues for pensions and savers this week.
Right now for savers – including us – there’s no bigger issue than the cost of living crisis.
The continuing impact of the pandemic, the current economic downturn and the real, hard impact of long-term weak wage growth and higher cost of living are making life very difficult for millions today.
That’s today’s challenge.
While people are certainly feeling it in their pockets, are they feeling it in their pension pots too?
PLSA research last month showed that 91% of schemes are concerned about a recession and 65% said the biggest risk of the current cost of living crisis is seen to be that members stop saving into a pension.
So far it seems that auto-enrolment is working. Contributions are holding up and most of us aren’t seeing increased opt-outs.
But some employers and employees are reducing the amount they are paying in, and withdrawals and cash outs have increased for the over 55s.
There is a risk that as fuel and mortgage bills bite and high inflation continues, more will follow.
That’s why schemes have already started sharing information on automatic enrolment to help people understand whether they want to opt-out.
They’re also signposting to useful information like debt advice and money helper.
A few DC schemes are reverting to a lower contribution level temporarily – but still compliant with AE obligations - and allowing employees to take the difference as cash.
And some DB schemes are awarding discretionary increases to ensure pensioner payments keep up with inflation.
The PLSA is gathering case studies to provide best practice guidance. Please get in touch with the team if you have something that does this job well.
Pension schemes are showing that they can help savers with the challenges of today.
But meanwhile, we must also keep developing solutions for the future.
There are 19.4 million people currently saving into a pension.
That’s 40% more than when we started out with automatic enrolment a decade ago, and two thirds of the UK workforce. [Opt-out rates are lower than we expected before AE.
That’s a fantastic transformation, and one built on consensus and collaboration between everyone involved in pensions.
But it has become clear that without more action, the retirement income so many are saving for won’t meet all their needs.
20% of households won’t meet the minimum standard of living set by the PLSA’s Retirement Living Standards -
Only 28% of households will meet the moderate Retirement Living Standard.
Even people earning twice the median wage will struggle to get over halfway between the minimum and moderate Retirement Living Standards.
51% of households will not achieve their target replacement rate according to the targets set by the Pension Commission
So why is this happening?
The drivers of under-saving are clear:
- A lack of clear objectives and goals for the pensions system and, with no goals, no monitoring of performance.
- A state pension that doesn’t protect people from poverty in retirement.
- A lack of extra help for women, ethnic minorities, people who work multiple jobs or part time jobs, gig workers, and the self-employed.
- Contribution levels that are too low to provide a reasonable standard of living in retirement.
If this doesn’t change, a new pensions crisis is looming.
We’re not the only people who recognise this. Consumer representatives, business representatives and the Government have already identified opportunities to improve Automatic Enrolment.
There was consensus on implementation and there is consensus on the need for improvement.
Today, the PLSA is publishing proposals for reform that will deliver the improvement savers need. A measured series of reforms that accept the limits created by the challenges of today, but – over 10 to 15 years – start to build the solutions for tomorrow.
So what needs to be done?
Well, before we set out the PLSA’s answers. Let’s hear from some savers here in Liverpool about what matters to them. [A video of vox pops is shown.] One thing that struck us when we saw that footage was just how much people were aware of the significance of pensions, the level of the state pension and AE contributions, and the need to plan for a good life in retirement.
Here’s how the PLSA plans to help them:
Five steps to better pensions
We’re proposing five steps to pensions adequacy:
- First, a new objective for the UK pension system to be adequate, affordable and fair –with regular formal monitoring of whether it’s on track.
- Second, increasing the state pension to match the Minimum Retirement Living Standard, to prevent pensioner poverty.
- Third, opening automatic enrolment to more people and increasing contributions.
- Fourth, extra help for people with very low pensions
- Fifth, and finally, the work everyone in this room can do to deliver for savers.
What are pensions here for?
That’s not a poll question in the conference app by the way.
In the UK we have no up-to-date, common definition of what an income in retirement should achieve.
And without a clear objective, it’s hard to create the right system or check whether it is delivering.
The Work and Pensions Select Committee’s Five Years On from Pension Freedoms report, published two weeks ago, agrees with us.
So it’s no surprise that so many people fall short of the retirement income goals set by the Pensions Commission – back in 2005.
We believe that the UK pensions system should be set an objective to be adequate, affordable and fair.
Adequate means nobody lives their later life in poverty, and many can maintain a fair proportion of their pre-retirement income.
Affordable means both workers and employers can afford to save, and we protect those on lower earnings from over saving.
And fair means we help all workers and balance the costs between them and their employers.
State pension
We’ve just heard on the video that savers feel the state pension is inadequate. It will “let you heat and eat”. Without private pensions people wouldn’t have much of a life .
So to avoid poverty in later life, the State Pension needs to increase.
At just over £9,500, it’s above one measure of poverty, the Joseph Rowntree Foundation’s absolute minimum of £8,000 a year.
But it is far below other common poverty measures that regard the poverty level as £15,000 or even £20,000. But £8,000 is inadequate, and £20,000 is unaffordable.
The PLSA’s Minimum Retirement Living Standard for individuals is currently equivalent to £10,900. It will cover savers’ needs and allow them to enjoy life and go for the coffees out or short breaks they want.
This figure was determined by Loughborough University on the basis of independent research with people across the UK.
It’s 15% higher than the State Pension.
And would bring it more in line with that of Ireland, but still behind the Netherlands.
And a possible reduction in other means-tested benefits could offset the cost.
The next step is to build on the success of automatic enrolment. And yes, it means we need to plan for higher contributions - not today, in the midst of a cost of living crisis, but in the future.
Since our Hitting the Target report 4 years ago, we have said that total contributions need to reach 12% in the early 2030s.
That is the single most effective reform to get more people on the right track.
This should be done gradually, beginning in the later 2020s, for both savers and businesses.
The timing of the PLSA’s reforms is as crucial as the reforms themselves.
To start with, from the mid-2020s – when, we hope, the cost of living crisis has eased – it’s time for the Government to implement the recommendations of the Auto-Enrolment review in 2017:
Reducing the qualifying age for automatic enrolment from 22 to 18.
And removing the lower earnings limit, gradually, so everyone would benefit from pension saving from the first pound of their earnings.
Removing the band earnings limits of £6,240 to just over £50,000 will make a big difference to lower earners – as contributions will start from the first £ earned rather than after the first £6,240 earned, and many of these low earners are women.
We also propose that employer contributions increase to 5%, so they match those of employees and achieve a 10% contribution by 2030.
And then, in the early 2030s, both should gradually increase by a further 1%, to a total of 12%.
Our research shows the difference it will make:
With the full package of measures we’re proposing, the projected retirement income of a median earner would increase by 25% and move much closer towards hitting a Moderate Retirement Living Standard.
For male median earners their income in retirement would increase from around £15,300 under the current framework to around £19,100.
And for female median earners from just under £15,000 to £18.500 a year.
This brings us onto the Under-pensioned groups
Increased contributions, reducing the minimum age and removing the lower earnings limit would give people a bigger time and salary base on which to build their savings.
But there are other reforms needed for certain groups.
Women in their 60s have just a third of the pension wealth that men have.
Women are more likely than men to belong to the 1.2 million people in the UK with multiple jobs, who more often don’t meet the £10,000 automatic enrolment threshold.
That threshold also disproportionately excludes ethnic minorities, who are more likely to have no pensions saving at all and to be paying rent in retirement.
And there are as many as 3.25 million employed in the gig economy, who are also excluded by the system.
We find clear benefits for the £10,000 trigger applying across multiple jobs rather than on a per job basis.
But we also need to protect people from over-saving and help them manage their personal circumstances.
Temporary opt-down or pause mechanisms could do this. More important now more than ever…
Industry initiatives
Our final call is to support and encourage industry initiatives to help make the most of the money being saved. PLSA members are already delivering here.
You’re demonstrating quality and enhanced contributions with the Pension Quality Mark;
Delivering initiatives like the Retirement Living Standards through digital tools;
Coming up with solutions for small pots;
Enhancing understanding with Pensions Dashboards and Simpler Annual Statements;
Getting behind a campaign to encourage people to pay their pension some attention;
Supporting innovations like CDC and the PLSA’s Guided Retirement Income Choices;
Discussing the benefits and challenges of incorporating a wider range of asset classes in our DC defaults
And you’re here to discuss today’s challenges and tomorrow’s solutions for our industry.
Consensus
We had consensus about AE a decade ago, we have consensus about the need to reform, and the PLSA is working today and will be working in the future to build consensus about what shape reform should take.
The UK pensions framework should be adequate, affordable and fair.
Our reforms will give everyone an adequate standard of living in retirement, whatever their employment status.
Gradual reforms to contributions and removing the limits on eligibility for AE will be affordable.
And it is fair to protect those who struggle with the balance between earning and saving, while supporting those who can save more.
We need to start planning these reforms now.
It’s been five years since the 2017 review. Five years when we could have set a timetable in placed for future pension increases.
We’re really asking for many of the same things as we did five years ago – but now set in a broader, objective framework.
We’re asking PLSA members, the government, and other bodies to work with us to find and deliver a future-proofed UK pensions framework.
It’s time for a new consensus.
We are publishing our thinking and research as a consultation because we’d really like to get your help, your challenge and your input for a pensions policy framework that helps everyone achieve a better income in retirement.
Thank you.
Read our new report Five steps to better pensions: time for a new consensus