‘We have not yet created a pension system’ – Bell
Image: Sandra Wolf
Pardon the Interruption
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The UK needs to create a pension system, the pensions minister has said, suggesting there needs to be a move away from the current landscape of savings pots.
Hints about how the government could approach pensions policy came from the pensions minister on Wednesday, who said he will be launching the pensions adequacy review “shortly”.
Speaking at the launch of the Institute for Fiscal Studies’ Pensions Review report, Torsten Bell gave some insight into what might be on the horizon for pensions policy.
“While there are many things to celebrate about the post-Turner landscape, the task facing today's generation of policymakers is clear. It's to finish the job. We have created savings pots, but we have not yet created a pension system,” he told an audience of pension policy specialists.
Bell highlighted the level of risk individuals are exposed to in pure defined contribution schemes, without necessarily having the tools to manage this.
“In the vast majority of cases, facing the entirety of the investment risk is a big deal,” he observed. “But it is trivial compared to the other risk that has been transferred: longevity risk... Managing that kind of risk as an individual is not something that we are, as humans, well set up to do.”
Longevity risk is something the government may be looking to address by facilitating a wider collective DC market, having already said that legislation for multi-employer CDC will be laid in parliament this autumn. The pension schemes bill also mentions CDC as an option for a default retirement pathway.
However, Bell stressed that pensions policy alone does not shape pension outcomes.
“I'll have more to say on this point in the future, but for today I would just add that thinking about the right level of savings is often more complex than some modelling suggests,” he said, possibly trying to manage the pensions industry’s expectation around contribution levels.
“The messiness of people's lives needs to be considered more fully” when it comes to saving, Bell argued, citing ill health and divorce as life events that can affect people’s finances – as well as the effect of living in households and increasingly, people receiving bequests.
The former chief executive of the Resolution Foundation also highlighted that even though pensioner poverty has fallen, pensioner inequality has persisted, partly driven by housing costs, while relative poverty among single pensioners has risen.
As housing costs will matter more for future generations of pensioners, “labour or housing market policies or developments have dramatic effects on retirement outcomes," he said.
Will CDC, rather than contribution levels, be in focus in the government’s pensions adequacy review?
