The system of occupational and private pensions in the UK is not fit for purpose. It is not the low cost, trustworthy system which savers justly demand.
It needs reform. In the UK, the state pension is the lowest relative to income of any OECD country. We therefore depend on private provision. Yet only 50% of employees currently contribute to a private pension.
For those who do save, the current system is poor. Indeed, if a typical British and a typical Dutch person save exactly the same amount for their retirement, the Dutch person will end up with a 50% larger pension.
British savers are often unaware of how costly pensions can be. Our research shows that people who are sold pensions at a charge of 1.5% per annum, do not realise that over the lifetime of a pension, this will result in 38% of their possible income being lost to fees.
Reform is needed. In a report, we outline how the UK has ended up in such a poor position, and the key questions which pension policy makers now need to address.
We also describe what an effective pensions architecture would look like. Building on the positive but partial reforms which are currently in place, Britain should aim for a low cost system of occupational pensions, based on auto-enrolment, and a limited number of suppliers whose scale allows them to offer low costs. Pension savings should be aggregated in a way which will give adequate returns; that suggests collective provision and trustee governance. And those charged with investing our money should do so responsibly; as trustworthy agents of those whose money they invest.
Few dispute these conclusions. Indeed most of the characteristics we suggest can be found in the pension systems of other countries, notably Denmark and Holland. Both are recognised as having one of the most effective pension provisions, and the lowest levels of pensioner poverty in the world. Few experts dispute the overall framework which the RSA advocates.
For this reason, we conclude that the answer to Britain’s inadequate pensions is not just a technical one. It is also a political one. No single agent can create effective occupational pensions. It requires all stakeholders to work together; politicians of all political persuasions; regulators and policy makers; representatives both of employees and employers; advisors, actuaries, academics and think tanks; industry groups and pension providers.
In a report ”Building the consensus for a People’s Pension in Britain”, we lay out in a series of memoranda, the sort of actions which these stakeholders need to take. During our work we have had the opportunity to talk to all of them. Those conversations make us optimistic. If momentum for reform builds, there is every prospect that, at reasonable cost, the new generation of British workers can enjoy adequate income in retirement.