Find all of the pieces from Prospect’s recent pensions supplement here
The realisation is taking hold that, like most developed nations, Britain faces a steadily mounting challenge over the next few decades to meet the retirement needs and expectations of its aging population. The state pension age is being equalised for women and men, and pushed up to reflect increasing longevity; millions of employees are being brought into workplace pension schemes to ensure they have more than just the basic state hand-out when they retire; the market for financial advice is being re-examined and free “guidance” made widely available.
But in spite of this growing tempo of political activity, the biggest question remains unanswered: can Britain pay its pensions bill? At a recent roundtable discussion in association with Old Mutual Wealth, Prospect convened a group of pension experts and policymakers to discuss whether and how Britain can tackle the pressing affordability issue.
Not surprisingly, the coalition’s imposition of a so-called Triple Lock in 2010, which will run at least until 2020, loomed large in the discussion. This dictates that the state pension will rise each year by a minimum of 2.5 per cent (unless prices or average earnings are rising faster, in which case it will track whichever is going up the most that year). In a period when both earnings growth and inflation are well below 2.5 per cent, the apparent generosity of this policy towards pensioners is provoking growing political controversy as their relative prosperity on various measures rises while many working-age groups stagnate.
There was also general agreement among the speakers that if maintained it would simply increase the affordability problem. “Arguably the triple lock is making a system that we knew wasn’t really working into one that’s even worse,” said Craig MacKinlay, a Conservative MP who sits on the Work and Pensions Select Committee.
However, data also show that as recently as 1989, around 40 per cent of pensioners were living below the poverty line, a proportion that has now fallen to about 13 per cent. The need therefore to address poverty among the retired had been a legitimate long-term policy goal for several decades and even now, figures from the OECD show, Britain is still projected to spend a lower percentage of national income on state pensions than the average among developed nations.
Although on this reading of the OECD figures Britain was still spending relatively modestly on its state pension, Former Financial Times demographics correspondent Norma Cohen argued it was vital not to look at state pensions in isolation but to consider the whole system. “The OECD figures also show that Britain contributes a higher percentage than any other member state to private pension savings as a percentage of GDP,” she said. Taking into account state support for private pension saving, for example via tax relief, led to a very different picture in which the state pension was far from the only threat to overall affordability.
The majority of this state support for private pension saving goes to better off people via higher-rate tax relief—a system that many expected to be reformed in this year’s Budget, but wasn’t. Paul Feeney, Chief Executive of Old Mutual Wealth, said he had argued for a move from tax relief at 20 per cent for basic rate taxpayers and 40 per cent or 45 per cent for higher earners to a flat 33 per cent for all, on the basis that this would enable an eye-catching two-for-one marketing message: for every £100 a saver puts in, the government would contribute £50, which might help to encourage more people to save.
Proposals under discussion before the Budget—such as a move to a flat 30 per cent or 33 per cent—would have left the state’s overall bill for tax relief largely unchanged but would have tilted the subsidy strongly towards those on lower income, who would pay tax income tax at 20 per cent and receive a pension boost at 30 per cent or more. The lack of reform here, therefore, represented a missed opportunity to direct support much more decisively towards the group that needed it most: working people on low incomes who were years or decades from retirement.
The vexed question of reform of tax relief highlights issues that are central to whether Britain can pay its pensions bill. On one hand, these are questions of distribution: how should the state share out the wealth the economy creates between those in retirement and those still in work, and between the poor and the better off? The general view that emerged from the discussion was that redistribution needed to be targeted much more towards the less-well off, both those in work (who were beginning to be helped by automatic enrolment into workplace pensions) and poorer pensioners. Recent retirees benefited from the Triple Lock but were in a generally strong financial position already. By contrast, many among the “older old,” particularly widows, were in much greater need of support. Treating everyone who had reached state retirement age as a homogenous group was not helpful.
Beyond questions of distribution, however, lay an altogether bigger issue that tends to become obscured by our tendency to concentrate on parts of the picture such as raising the state pension age, reform of tax relief, auto-enrolment or the Triple Lock. Put simply, this concerns the capacity of the British economy to produce enough wealth that can be distributed.
Duncan Weldon, Head of Research at the Resolution Group, pointed out that Britain’s pension problem is largely a result of its worsening demographics—growing longevity combined with a birth rate that isn’t high enough to maintain or increase the size of the working population.
The logical conclusion is that in order to make up for their static or declining numbers, British workers are going to have to become much more productive over the coming decades. Unless we can find a way to achieve this, the economic output we are able to generate as a nation will fail to keep pace with the promises that have been made to people once they retire. And at this point, questions over how best to distribute the nation’s wealth will become acute and politically explosive.
Norma Cohen argued that addressing existing problems within the working population could help to alleviate our productivity shortfall. For example, among people aged 50-64 a “staggeringly high percentage are just not participating in the workforce and they haven’t even got to state pension age yet,” she said. “Long-term unemployment is higher at 50-64 for men and women than for any other age group, which suggests that there is something about the labour market.
“We need to look not just at the workplace or people who are elderly: we need to look at people who are not participating economically.”
This article is drawn from a roundtable discussion hosted at Prospect’s offices on Wednesday the 25th of May 2016 chaired by Prospect’s Andy Davis with Paul Feeney, CEO of Old Mutual Wealth, and members of the House of Commons Pensions Select Committee John Glen MP and Craig Mackinlay MP to explore the main themes contained in Prospect’s recent pensions report titled: Can Britain Pay its Pensions Bill? For more information please contact firstname.lastname@example.org.