We need ambitious pension reform – and collective’s the way to do it

With less than half of the population saving enough for a decent income in retirement, we’ve got a living standards crisis on the cards.

Imogen Parker is a research fellow at IPPR

This morning the Times reported that the government have put forward their latest thinking on pension reform.

New thinking is both welcome and timely. With less than half of the population saving enough for a decent income in retirement, we’ve got a living standards crisis on the cards.

But trouble brewing is masked by the fact that current pensioners are better off than ever before, with pensions incomes rising faster than incomes of those working, and pensioner poverty at the lowest levels on record.

Part of the problem is the ageing population. People are living longer, and while this is great for individuals, it creates problems across the board. Even with rise in the State Pension Age, the proportion of people working compared to retired will keep dwindling.

But the other problem is the types of pensions people are saving into. The steep decline of final salary pensions – or ‘defined benefit’ – means less is contributed into a pension, savers face all the risks associated with a pension (with no guarantees or certainty,) and they have to go through a costly annuity process, where they lose up to a quarter of their savings in fees.

Even with the introduction of default opt-in pensions in auto-enrolment, the types of pension products available mean unless savers contribute far higher amounts than required, their savings won’t convert into a decent wage in retirement. But the living costs squeeze and fragile economic recovery make raising the minimum contribution levels for employees or employers a tough ask (and increase the risk of people opting out).

The minister needs to prioritise a pension product which doesn’t require employer backing but gives savers a better deal. One which doesn’t just reassure savers to encourage them to contribute more, but also offers them a higher income in retirement.

The best way to do that is with a collective pension which shares the risks associated with pensions amongst savers, keeps finances invested, and offers a retirement income straight from the investments – cutting out the annuity process altogether.

Yesterday the RSA again made a compelling case for collective pensions – and one the government appear to have listened to, given its serious consideration in their latest paper. Their calculations show that average incomes could be around a third higher (without anyone having to contribute a penny more). Even just bringing the annual management fees down to the collective average could bump up every individual’s monthly retirement income by hundreds of pounds.

New IPPR research consulted with the general public on these new pension ideas. We found a collective pension was by far the most popular idea the government has come up with. People didn’t just think they would do better out of a collective scheme, they thought it was fairer for everyone to share the risks and rewards inherent in pensions and which individually savers have little control over.

Steve Webb is right – there are questions that need to be answered about how to integrate this kind of pension model into the UK. But with auto-enrolment coming, and an extra nine million people about to invest in their pension, this is the perfect moment for ambitious reform.

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