As with everything, it seems, in modern life, pensions is politics. There ought to be consensus across the political parties on the importance of everyone’s long term financial future and how to achieve it, but the different sides seem further apart than ever before.
Throughout the developed world, we are getting older and living longer. Increasing longevity impacts private sector pensions, public sector pensions, the state pension, the NHS, long term care – the list goes on. And with an aging population comes the all-important grey vote – the section of the electorate most likely to turn up and put their cross on the voting slip next week.
In November last year, a report from the all-party Commons work and pensions committee recommended scrapping the triple lock (which increases the state pension in line with average wages, inflation, or 2.5%, whichever is highest) as it was “unfair and unsustainable”. In March, an independent review by John Cridland, former Director-General of the CBI, supported this recommendation. It also recommended speeding up the planned increases in the state pension age, as sticking with the current plans would also be unsustainable.
Similar recommendations from an all-party committee and an independent review. Political consensus assured. Or maybe not. The party manifestos highlighted the glaring differences of opinion that remain.
The state pension is not the only area of the pension landscape where unfairness and unsustainability raise their heads. Here are a few examples
- The private sector is moving at an ever increasing pace from unsustainable DB pensions to less favourable DC workplace pensions while the public sector puts its fingers in its ears and maintains DB benefits in spite of them being unfunded and paid for by an ever decreasing percentage of the population (the workforce)
- Higher earners (albeit not the very highest earners) get the biggest boost to their pension pots through tax relief on contributions at their marginal rate
- The Lifetime Allowance, arguably a tax on good investment decision making, favours members of already superior DB schemes over DC pensions due to the way in which it is calculated.
In politics, something being unfair or unsustainable is not enough to justify attention if it will not win votes.
Putting aside unfairness and unsustainability, we have developed a system that is complex and confusing, and a population seemingly further and further away from achieving their desired retirement outcomes. While auto-enrolment is bringing an ever increasing number of workers into the pension fold, constant tinkering with pension legislation to balance the books is making it harder and harder for them to understand what they are likely to get when they finally reach retirement – that mythical place at the end of the rainbow – and if they are not engaged, they won’t contribute enough.
When you work with it every day, it is easy to overlook just how confusing the pension landscape has become. But when you have the annual allowance, the tapered annual allowance, the money purchase annual allowance, the lifetime allowance with primary, enhanced, fixed and individual protection, PCLS and UFPLS, it is no wonder people fail to engage.
We need a system based on simplicity, clarity, fairness and sustainability from whichever party is in power.
Our current pension system is neither strong nor stable, and good pension outcomes remain not for the many but for the few.