Pension reform: don’t stop me now

18 June 2015

The Coalition oversaw sweeping changes to pensions. Reforms to the public pillar – introducing the single tier, increasing the state pension age – were complemented by a revolution in private pensions. Many have called for a period of consolidation to allow these changes to bed in. But the new Conservative administration needs to push on. Indeed, the retirement landscape still faces considerable challenges.

For the Exchequer, chief of these will be forthcoming increases to the cost of pensioner expenditure. Between 2015-16 and 2064-65, the yearly value of pensioner benefits will grow by 1.3 per cent of GDP. Part of this increase is the inevitable result of an ageing society. But, thanks to the triple lock, more than 80 per cent is driven by increasingly generous transfers to pensioners. Indeed, by the time the final cohort of millennials retire, the triple lock will add 26 per cent of GDP onto the national debt. Increasing the generosity of the State Pension made sense when pensioner poverty was widespread. But this is no longer the case. Once housing expenditure is taken into account, pensioner incomes are now higher than non-pensioner incomes.

Having reclaimed the One Nation mantle, the new Government should recognise that the triple lock and universal pensioner benefits crowd out resources that could otherwise be spent on more vulnerable individuals. However reform need not be at the expense of pensioner wellbeing. As Reform details today, the triple lock could be replaced with a mechanism that retains the key benefits of the current policy without the associated costs. Meanwhile free TV licenses and the Winter Fuel Allowance should be rolled into a cash benefit only available to those on low pensioner incomes. It simply does not make sense to continue distributing perks to wealthy retirees.

An equally daunting challenge for the new Government is the adequacy of future retirement incomes. 11.9 million of the current workforce will not be able to maintain their current living standard in retirement, with middle and high income earners most exposed. Without a considerable increase in savings, retirement will prove a disappointing experience for many.

Individuals are best placed to make decisions about their retirement, however governments have a role to play in supporting those that want to save. Auto-enrolment, which has delivered an additional 5.2 million people into a workplace pension, was an important step down this road. However the government now needs to focus on helping middle and high income earners increase their contribution rates. Trials of auto-escalation schemes – where individuals pre-commit to increasing their contribution rates when their pay increases – have proved successful in America. In addition to developing an online platform to help savers understand their retirement position, and bringing clarity to the pension tax relief debate, such a policy could put private pension savings on a firmer footing.

However the new Government cannot afford to focus simply on the accumulation of savings. As life expectancy increases, individuals will need to work longer to sustain themselves in retirement. The Coalition Government’s decision to abolish the default retirement age and accelerate increases to the state pension age were appropriate responses to demographic shifts. Yet in the absence of initiatives aimed specifically at helping older workers remain in the labour market, increases in the retirement age are likely to lead to increased reliance on working age benefits, adversely affecting the wellbeing of older people and placing additional strain on the welfare state.

The full consequences of these challenges will take years to unravel, so the temptation to dither will be strong. It should also be recognised that pensions is tough politics for the new Government: pensioners turn up to vote in droves, and disproportionately vote Conservative. However the wellbeing of current and future pensioners depends on further reform. The Government should act, and it should act now when its mandate is strongest.

William Mosseri-Marlio, Researcher, Reform

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