It may seem like only yesterday, but it is a decade since the Pensions Commission chaired by Adair Turner delivered its final report on the potential future of pension saving in the UK.
Always a playground for the politician, mandarin and lawyer, pensions has seen massive change and radical reform since the publication of that report. But how influential has it been on the development of policy ever since and what is its legacy?
Turner, now a senior research fellow at George Soros’s think tank, the Institute for New Economic Thinking, believes the work of his team has greatly influenced the pensions policy we have seen over the last ten years.
A new deal
It was controversial as the commission formulated a plan for the provision of a basic core structure from a more generous basic state pension that was linked to earnings as a means to try and end poverty in retirement.
The commission argued the existing structure of means-testing was an impediment to private saving, and introducing a more transparent state benefit would provide individuals with a better understanding of their future income.
This state provision would be bolstered by auto-enrolment (AE) – implemented in 2012 –which would begin by offering employees a buy-one-get-one free contribution rate, with the member paying 4%, and the employer (3%) and government (1%) in effect matching the contribution.
This all seems reasonable now, but at the time, there was considerable opposition to such a radical overhaul of the status quo.
“We argued there had to be changes to the state side of the system to reduce the role of means-testing,” says Turner. “The logjam we broke was the insistence that the pension age had to stay at 65.”
These were major concessions, he says, as all parties were committed to linking the state pension to prices in order to control public expenditure, but that made it less valuable and resulted in more means-testing.
Looking back, Turner says that given the political consensus, AE’s implementation was much slower than he would have liked.
“One understands the caution in terms of the burden on business, but I think we could have gone faster,” he says.
Despite this reservation, the fact that more than five million people have been enrolled – and far fewer have opted out than anticipated – he says AE has been “successful beyond our hopes”.
Steve Webb, former pensions minister and now director of policy and external communication at Royal London, says the commission’s legacy has been “highly positive”.
AE is certainly the jewel in the crown but the the commission deserves recognition for getting the buy-in from not only government, but all parties, as it set the tone for the next decade.
Though it received less attention than AE, the commission’s work on the state pension was crucial for Webb.
“It developed a much more realistic attitude to state pension age and placed this on the agenda,” he says. “The coalition then had to address it, as little has been done in the century since it was introduced.”
However, Webb feels the commission could have gone further on state pension reform, going as far as to say they “pulled their punches” on the matter. It would have made his work easier, but he accepts the commission had already achieved a great amount and had “broadened issues that were politically unpalatable”.
“NEST is the greatest contribution of the commission,” says Aberdeen Asset Management head of retirement savings Gregg McClymont, who served as shadow pensions minister until May’s general election.
As a universal provider, he says its retirement blueprint has been very influential on the rest of the market.
Though saddled with restrictions on the business it can write – an obstacle not of their own making – it has led the debate on how to make this project successful.
“Free from the same commercial pressures as the private sector, NEST has been successful in shaping the behaviour of other providers as the AE market has evolved,” says McClymont.
Pensions and Lifetime Savings Association director of external affairs Graham Vidler says the commission’s legacy comes in two parts. The first, AE, has been a success, but the other is an opportunity missed.
“AE goes with the grain of how people behave and was implemented on the back of careful thought and consensus-building,” says Vidler. “While there is a lot of work still to be done, it is undoubtedly a game changing success.”
However, the most important piece of the report that most have forgotten, says Vidler, concerns a standing commission to monitor the commission’s legacy and ensure progress is made without fear of political prejudice, tokenism or bloody-minded interference.
The report forced the industry to reconsider the reason for helping people to save for a secure retirement.
“A standing commission could do just this,” adds Vidler, “What a shame no one listened to that as there is a danger of undermining what we have achieved.”
Though the catalyst for much of the change over the last decade, Turner’s magnum opus doesn’t receive universal praise.
BESTrustees chairman Alan Pickering, says the commission was “a massive missed opportunity” and was disappointed in the length of time it took to make the report.
“At the launch of the report, I said the central recommendation was barmy and with the benefit of hindsight, I wouldn’t change that adjective,” he says.
“The system it proposed was fatally flawed as it rejected a small business exemption from [AE], and was unwilling to contemplate a higher minimum salary.”
This meant people were expected to save for a pension, adds Pickering, despite being unable to live on their current earnings, let alone what might be generated by AE.
How successful – or otherwise – the inclusion of the 1.8 million smallest employers in the AE project is, remains to be seen over the coming 18 months.
However, Pickering says the failure to reform the state pension incorporating benefits the taxpayer currently finances – such as winter fuel allowances – continue to fuel intergenerational strife as “young people are financing the state pension on a far less rosy retirement than their parents and grandparents”.
He would also halt the roll out in the workplace and try to make existing AE arrangements “much more employer friendly”.
Yet it is the latest government reforms that come in for particularly strong criticism from Pickering.
“The Pensions Commission and the folly of freedom and choice mean the pension system could slip further into institutional decline – if not disrepute by small businesses – and challenged by letting people do something to secure income that won’t peg out before they do.”
Vidler shares some of Pickering’s concerns, saying pensions are for “income in retirement and retirement is not about lumps of capital in the bank”.
Irony and inconsistency
Though he could not be expected to have foreseen the recent policy changes – and arguably a standing commission may have had something to say about the speed with which freedom and choice was implemented – Turner is sympathetic to this view.
“The danger of pension freedom is that we’ve got an AE system where people have to build a pot, but then what do they do with those pots when they get to retirement?” says Turner.
“I think it unfortunate that we went from a policy to put back the age of required annuitisation – or the amount of required annuitisation – and abolish it entirely.
“Forcing people to annuitise at 65 makes no sense, but complete freedom does creates a slightly ironic combination that we moved in the direction of the state providing more encouragement in the accumulation phrase of AE, but then said once you get to 55 you can do whatever you want with it.”
Turner’s concern is this introduces “inconsistency” and says that what now matters is the quality of advice and the hope that there will be “thoughtful product design to aid people to combine drawdown with elements of insurance against living longer, which would be appropriate”.
CBI principal policy adviser – labour market and reward, Rachel Smith says since the implementation of the Turner Commission findings, real progress has been made in getting more people to save into a pension through AE.
“Encouragingly, business is on board too, with 96% of firms believing there is a strong business case for providing a pension,” she says. “This is a good indication that, in future, businesses will continue to support pension savings as a valued part of the reward package, rather than a legislative requirement.”
But, she adds, it is important to remember the job of AE isn’t finished. Smaller employers who have yet to stage require more support than their larger counterparts.
“The last two parliaments have seen wide-ranging reforms including AE, state pension reform and new freedoms in the Budget 2014,” she says. “Businesses are telling the CBI that the pace and magnitude of changes are becoming a real challenge. Stability must, therefore, be a priority for the government.”
Turner is acutely aware of the need for the whole project proposed by his commission to be advanced and acknowledges there are gaps in the system.
“We’ve never been able to work out how you deal with AE for the self-employed,” he says. “Given the self-employed sector is an expanding part of the labour market, there is a danger that we’ve delivered a significant solution of the long-term problem for small and medium-sized enterprises, but left ourselves with another problem.”
Contribution levels are also a concern and he would like to see them increased, but is satisfied that even ten years on, the commission he chaired can be satisfied with a job well done.
“With the changes we have seen to the basic core of the structure with a more generous state pension at a later age to remove means testing and AE delivering a funded pension with a low administration costs, plus the option of NEST, I feel pretty good about the basic structure that has gone ahead.”
When Turner delivered his final report, he could not have foreseen the debate that would rage about innovations such as collective DC (CDC) and defined ambition (DA).
Both are strategies that give employers the space to provide more than AE allows for and as such are welcomed by Turner.
“Many large employers do CDC, where the crucial thing is to gain economies of scale, so that you’re aggregating it to reduce administration costs and buying fund management at a wholesale – not resale – price,” he says. “Defined ambition is also a great idea and the tragedy is that there is a role for an element of what we used to call defined benefit.”
Turner believes there is an appetite for risk sharing and though plans to formulate a structure for the UK have been shelved, he believes the public sector could look to moving more in that direction. As for whether the public sector could have become a provider, offering DA to the private sector, Turner likes the idea, but thinks it impracticable.
“We could have had more creativity as to the public sector moving towards defined ambition, with the development of a legal framework to cover the private sector – or even the public sector being a provider of that.
“I think that would have been valuable, but I think this may be a train that has left the station and becomes impossible at this stage.”
But perhaps there is still hope for those who wish to see these structures developed. Webb says he understands why CDC and DA were mothballed, and believes that new pensions minister, Ros Altmann, has chosen the right short-term priorities.
“The prime legislation on CDC is through, so we will get the consultation,” says Webb. “But the cost-cutting of central government means capacity is reduced. So it’s not full steam ahead, but a slow burn. But is not off the agenda.”