Pensions – perhaps Nanny really does know best

6th November 2017 by Steve Herbert

For most of the last decade pensions – and pension savings – has been a really big political topic. At the 2015 General Election pretty much every major political party gave over large sections of their manifestos to the subject, yet less than two years later and the topic of pensions was most notable by its absence in this year’s political commitments.*

Yet the importance of pension savings to the financial future of the nation has not gone away.  In fact recent developments suggest to me that pensions should still be front and centre of much political thinking.  Many would disagree with this sentiment.  After all, the auto-enrolment legislation has worked as intended and expected, and 8 million workers have now been enrolled and are actively saving for their retirement.**  Job done.

But it isn’t, is it?

The reality is that the levels of regular savings being made are often dismal, the engagement and understanding of those enrolled lacking, and most concerning of all is that the progress in pension savings made with auto-enrolment is now perhaps being somewhat undone by the recently announced and implemented Pension Freedoms.

For it already seems evident that the new Freedoms are resulting in far too much money being disinvested from Defined Contribution pension schemes far too quickly to provide a lifetime’s worth of retirement income.  Yet the move is popular with the electorate, so all sides of the political debate have been somewhat slow to criticise this worrying development.

It should also not be overlooked that the injection of large sums into the pockets of older workers has doubtless resulted in some rather nice tax windfalls for the Treasury, and is presumably also helping to shore-up the spending figures of the nation.  Another reason why the success or otherwise of this policy may go largely unchallenged in political circles at present.

But the original drivers behind auto-enrolment were precisely because the nation was not saving enough for its collective retirement income.  These arguments seem to have been forgotten for the moment, yet the cost challenges for State provision of pensions, healthcare, social care, and other benefits for senior citizens have certainly not gone away.  Those arguments will be back – and probably in a much starker form – once it is apparent that many long-term pension income streams have instead been entirely spent in the early years of retirement.  And when that happens there will be little choice for the State other than to pick up even more costs for the now impoverished pensioner and dependents.

It should also be noted that the use of Pension Freedoms is already spiralling way beyond the Defined Contribution schemes it was introduced to serve.  There has been a sudden rash of transfers – according to The Pensions Regulator some 80,000 such transfers in the 12 months to March 2017 – from Defined Benefits (DB) pensions to Defined Contribution (DC) schemes.  Many of these transfers will have been for good, compelling, and justifiable reasons.  Yet many others will be driven purely by the seductively large sums of money that can then be accessed by the saver/pensioner as a result of the Defined Contributions freedoms.

These issues have not been entirely overlooked at Westminster however, and it is reassuring that House of Commons Work and Pensions Select Committee is currently reviewing the use of Pension Freedoms.  But I am concerned that any suggestions made by the Committee to curtail some of the excesses of this option may fall on stony political ground.  Critics of any changes will likely revert to the old accusations of the “Nanny” state, and how personal freedoms should always be the dominant concern.

Yet the truth is that often Nanny really does know better than her charges.  Nanny is able to use her greater experience and knowledge to look beyond enticing short-term attractions, and see the much bigger picture.  Whilst she may not always be entirely right, she is often much less wrong than those she is seeking to protect.

So I live in hope that any improvements proposed by the Work and Pensions Select Committee to limit some of the extremes of Pension Freedoms are carefully considered by all the parties at Westminster.  It is surely in everyone’s interest – State, savers, pensioners, and indeed the pensions industry – that the Freedoms are used only with extreme care.  The reality is that new Pension Freedoms are welcome, but they are not right for everyone.  Nanny may indeed know best.

Steve Herbert is Head of Benefits Strategy at Jelf Employee Benefits 

*with the exception of increases to the State pension of course

** The Pensions Regulator (TPR) website 11/07/17