The pensions system in the UK is not broken By Huw Evans

Pensions policy is an issue that stirs violent passions in the hearts of a tiny minority, yet few public policy areas are so important to get right for the vast populace of working Britons. We have an ageing population and insufficient pension saving, a small group of fiercely engaged stakeholders yet an apathetic population at large. How can we resolve some of these challenges and where does responsibility lie between pension companies, employers, individuals and politicians? The starting point for this debate has been that the pensions system is broken and needs fixing. If we accept the premise of the argument, Labour has some explaining to do as the party in government for most of the last 16 years, responsible for very considerable changes to both DB and DC pension schemes. Happily for the reputation of a government I served in as a special advisor, I dont accept the premise. This country is home to one of the most stable pensions industries in the world, providing workplace and personal pensions to tens of millions of adults. With the introduction of auto-enrolment and the establishment of NEST, the UK has enacted one of the most radical pensions reforms in Europe designed to encourage and provide pension saving for an additional 6-9 million people by 2018. All this is built on the foundation of a long-standing state pension system which provides a basic safety net against poverty and is being simplified by the current government to run alongside auto-enrolment in a way that will help avoid pension savings causing uncertainty over means testing. These are huge advantages that we gainsay at our peril; what is needed to overcome the problems that remain is pragmatism, not pet schemes driven by dogmatism.

What then are the necessary next steps? All of us have a part to play: Pension Companies: UK insurers have to ensure the successful delivery of auto-enrolment, continuing to work closely with employers and employees to maximise take-up and minimise drop-outs. We have started well with drop- out rates so far at 10% or less - but the biggest challenge comes with the smaller companies that start to be autoenrolled over the next two years. Just as importantly we have to continue the work we have started to explain charges & fees in a way that customers understand with full transparency of the costs. Charges have now been falling for over a decade with the average new default workplace scheme having an Annual Management Charge of just 0.52% but it is vital for the credibility of pension saving that scheme charges are as low as possible, especially when growth is subdued. The pensions industry also has to continue to be vigilant about fund performance and high pay in the companies it invests in. But it is nonsense to suggest, as Michael Johnson does, that the pensions industry is relaxed about excessive pay in the companies it invests in; what was last years Shareholder Spring if not a protest about those very issues? As for returns, well of course they have been depressed during the worst financial crisis since the 1930s. But as funds invested for the long term to maximise return over a cycle and preserve gains as retirement approaches, pension funds remain a critical way for people to save profitably for retirement, with products provided by an industry that is continuing to reform to meet the needs of the modern world. Employers: Employers are also critical. The old DB schemes with typical contribution levels of up to 20% may have become unaffordable as stock market returns have fallen, the basis of pension fund taxation changed and pensioner longevity increased, but employers still have a clear ethical responsibility to their workforce to contribute the maximum they can afford to pension schemes, not the auto-enrolment minimum. They also have a duty which many, encouragingly, have demonstrated so far to explain the benefits of pension saving to workers to encourage high take-up rates. With FSA reforms to the Independent Financial Advisor system making personal financial advice unaffordable for many, employers also have a critical role in facilitating financial advice being given to their workforce so they are equipped to take informed decisions about their financial planning.

Individuals: But to be truly successful in building a successful savings framework for the future, individuals all of us also have to take a degree of personal responsibility. No pensions system in the world can successfully deliver good retirement outcomes for individuals without people themselves taking a degree of responsibility for their post-work income. This means saving as much as possible, sticking with it even when market fluctuations temporarily depress returns and working for as long as possible to maximise the pension pot. A contribution level rising from 8% to 12% will increase an average pension pot by 50% over the lifetime of the scheme, while deferring retirement even for a few years can make a big difference to the income available. Both contributing more and working longer are in the hands of the worker to potentially do something about. Politicians: Finally political leaders have a key part to play. By setting a tax system that continues to incentivise people deferring their takehome income into a pension scheme and by not changing the rules every couple of years. By being honest with the public about the consequences of an ageing society, including that without saving more, future generations will be less well off than current generations for the first time in human history, not least because of the substantial care costs that come with living longer. Most of all, by working across party lines, as was done successfully with the introduction of auto-enrolment, to ensure that this most long-term of government policy areas is built on political consensus. All of us, therefore, have a lot to get right. The pensions system in the UK is not broken but it can and must improve to meet the very significant challenges of the future. Pension providers are committed to the change agenda but it is a journey that insurers, employers, workers and politicians must take together, avoiding some of the hyperbole and divisive language which sometimes passes for stakeholder debate in this area. We all share the future and it is in all our hands to ensure we save enough to enjoy it. Huw Evans is Operations Director at the Association of British Insurers which represents the long-term savings and pensions industry. He served as a special advisor to the Labour Government from 2001-06, having worked for the Labour Party 1996-2001.

Political notes are published by One Nation Register. They are a monthly contribution to the debates shaping Labours political renewal. The articles published do not represent Labours policy positions. To contact political notes, email onenationregister@gmail.com