Our new government must tackle the ‘five great evils’ that are undermining DC pension saving

Is this a Beveridge moment for the UK pension industry?

With a new government taking office today with a sizeable majority in the House of Commons, the Labour administration has the opportunity to reshape the country in its image.  

In his landmark report on the welfare system in 1942, William Beveridge identified five great evils that plagued society: disease, idleness, ignorance, squalor, and want. If this new government is genuinely interested in effecting long-lasting change that raises the living standards of millions of people (and can act as a growth engine for UK PLC), it could do worse than to start by addressing the ‘five great evils’ of DC pension saving: inadequacy, inequality, irretrievability, inefficiency, and insecurity. 

Much of the groundwork for tackling these challenges has already been laid by successive governments over the last 20 years. But, given Labour’s manifesto commitment to a full-scale review of the pensions landscape, it would do well to keep in mind the radical reforms of its illustrious predecessor in the pensions policies it brings forth.  

Inadequacy  

Automatic Enrolment has been a huge success, getting more than ten million people saving for their retirement for the first time. This was an important first step, but it’s no secret that people are not saving enough to achieve an adequate income in retirement. Addressing this issue should be an urgent priority for the new government, not only for the sake of the quality of life people enjoy in retirement but also for the health of the public finances because inadequate savings increase the cost of benefit payments to retirees. So, tackling this challenge would help the government deliver for savers and taxpayers.  

In the short-term, ministers can start the process of addressing this issue by enacting the principal recommendations of the 2017 Automatic Enrolment Review to enable saving from the first Pound of earnings and from 18 years of age, which would have real benefits for the retirement prospects of those at the lower end of the income distribution. Over the medium term, overall contribution levels need to increase, so the proposed review of the pension landscape should set a clear timeframe for increasing minimum contributions from the current rate of 8% of qualifying earnings to 12% of total salary.  

Inequality  

For any system to get widespread long-term acceptance, it needs to be equitable. Although Automatic Enrolment has brought more people than ever into pension saving, the benefits are not being felt equally by different groups in society. Evidence shows that this is particularly the case for women, people from ethnic minority backgrounds, and those with disabilities. For example, LCP research forecasts growing inequalities between men and women, finding that there is currently a gap of around £25 per week between the average DC pension income of men and women, but this gap is on track to rise to over £30 per week by the mid-2040s.  

There is a complex range of factors that contribute to the inequality that persists in the pension system, and, unfortunately, there are no easy solutions. However, a pragmatic way to reduce pension inequality would be to review the Automatic Enrolment trigger to ensure it is set at the right level to optimise pension saving amongst low paid workers and those working in multiple jobs. To address the ‘motherhood penalty’ in particular, the government could also simplify the rules around pension contributions during maternity, paternity, and other family leave to require employers to pay contributions on an individual’s full salary throughout the entire period of leave, including making up the difference between what they typically contribute and what they contribute whilst on maternity leave (as, in practice, most members make employee contributions at a reduced salary level whilst on any type of family leave). 

Irretrievability  

In the UK, we have a long-standing and well-known problem with lost pensions. The latest data suggests that around one in four people have lost track of at least one of their pensions and the total value of lost pensions is in the region of £27 billion. In the midst of a cost-of-living crisis and increasing longevity, the importance of these savings to people’s financial wellbeing in retirement is growing in importance every day. We need a multi-faceted solution that reunites people with their lost pots and stops their exponential increase.  

Fortunately, there are two ready-made solutions to this challenge that the government can put its energy behind. In the short-term, finally delivering pensions dashboards will enable people to see all of their pension savings on a single, online platform of their choice, consolidating pensions in the minds-eye of individuals and, potentially, into a smaller number of schemes. This is essential to help those in retirement now or approaching it in the near term. To solve the problem of proliferating small posts, the government should use the infrastructure provided by the Pensions Dashboard Programme to ensure that small left-behind pots are automatically consolidated into a worker’s current active pension pot.  

Inefficiency  

How effectively DC scheme assets are managed, and the service members receive for the costs and charges they pay have been hot topics for some time and are becoming an increasing focus for the industry. The last government prioritised new regulation in this area, which was due to be released in 2024 but got lost in the pre-election period. The industry has worked collaboratively to try to produce a new value for money (“VFM”) framework that will allow all DC schemes to determine whether they are providing VFM to their members.  

Although there is often a tendency for new governments to ‘throw out the baby with the bath water’, replacing initiatives of previous administrations with their own, Labour should maintain the momentum behind the new VFM framework and finalise the required regulation as soon as possible to help improve member outcomes. Going beyond the current proposals, the government could also consider integrating the principles of the FCA’s Consumer Duty into the new VFM framework to deliver a more consistent experience for members in different pension products.  

Insecurity  

The purpose of pension saving is primarily to provide an income for retirement, but, all too often, this is lost in industry debates on post-retirement. Since the introduction of the Pension Freedoms in 2015, savers have had much wider choice regarding what to do with their pensions in retirement. This increased flexibility has exposed savers to a range of new potential risks at a time in their lives when they are most vulnerable to the impact of financial shocks and the consequences of bad choices.  

Famously, this is the most difficult problem in finance. We see three key elements to any potential solution. Firstly, the government should progress existing proposals to place a new duty on trustees to offer decumulation services that are suitable for their members and consistent with pension freedoms. For most trust schemes, the solution will be to signpost members to a Master Trust. Secondly, new regulation should require Master Trusts and providers to provide a default ‘do it for me’ retirement strategy that balances the typical needs of members in retirement (ie. income flexibility in early retirement, followed by certainty in later retirement). This will provide the security people require in later life. Finally, the pensions guidance service provided by the Money and Pensions Service should be reformed to offer individualised, rather than generic, guidance. This will help members to make decisions on a more informed basis.  

The Webb Report?  

Beveridge wrote in his eponymous report that “The object of government in peace and war is not the glory of rulers or of races, but of the happiness of the common man.” Perhaps Sir Keir Starmer could enlist the services of another knight of the realm to further increase “the happiness of the common man” by slaying the five great evils which are undermining pension saving. Sir Steve Webb awaits his call.