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Consensus revisited: the case for a new Pensions CommissionBen Franklin February 2015

Consensus revisited: the case for a new Pensions Commission I 2 I

Contents

Executive Summary....................................................................................................................3

Introduction..................................................................................................................................7

1. Policy context...........................................................................................................................9

2. Progress since the Turner Commission.......................................................................................12

3. Economic context....................................................................................................................21

4. Discussion: summarising the case for a new Pensions Commission...............................................25

5. The blueprint for a new Commission...........................................................................................26

Appendix: attendees at January roundtable....................................................................................29

Acknowledgments

The ILC-UK would like to thank Prudential for making this report possible and to Tim Fassam and Peter Cottingham in particular.


Executive summary

• Retirement planning is difficult with numerous moving parts to consider.

• It has been made more complicated as savers have faced constant policy change.

• Savers have also faced the perfect storm of falling real incomes, low investment returns and rising life expectancy.

• A new Pensions Commission is needed to rebuild consensus via broad consultation and tackle the challenge of income inadequacy in retirement.

Why do we need a Commission?

Retirement is an uncertain business. Even at the best of times it is difficult to know how much money to save for retirement and how to generate an income from those savings at the point of leaving the workforce. There are a multitude of questions that need answering such as: what will my living costs look like for the next 30 years? At what point will my health or my partner’s health start to degenerate? What costs will the State pay for and what will I have to pay for myself? Do I need to leave something for my children and will I be able to?

Answers to these questions have such a high margin of error that some people choose only to engage when circumstances dictate – such as when their partner becomes ill and needs long-term care. But these tough questions are made particularly hard by the current political and economic environment which seems to make the future more intangible than ever.

The relentless march of pensions policy has seen a myriad of changes taking place over the last five years. Some of these, such as Auto-Enrolment and reforms to public sector pensions have been carefully thought through, but there have been a number of other measures which, arguably, have not benefitted from such extensive public planning and consultation. Sudden and deep changes to the pensions landscape inevitably make it harder to plan for the future, as everyone comes to terms with the new rules of the game. This problem is exacerbated when there are a number of big changes taking place simultaneously.

It is, however, undoubtedly the case that some of the reforms over the last five few years should help achieve better outcomes in retirement. Auto-Enrolment in particular, should ensure that people have at least some private long-term savings which they can use to generate an income in later life. However as this report shows, contribution rates may have to rise significantly in order to ensure employees secure pension pots of sufficient size to deliver an adequate income in retirement. And, as a result of the new pension freedoms, people could decide to ‘blow’ their pension pot at the point of retirement, losing out on the potential value of an income stream over the remainder of their lifetime.

Uncertainty about what people should do in response to the evolving policy environment is compounded by the perfect storm of stagnant real income growth and low investment returns. The UK’s economic recovery is founded on rising household spending, but in the absence of rising incomes, savings will fall and indebtedness will rise. According to the Office for Budget Responsibility, the household debt to income ratio will rise above its pre-financial crisis peak in 2018, while the savings ratio will fall to its lowest level since 1997. At the same time, we are potentially entering a “new normal” period of relatively low investment returns, with average annual returns on bonds and equities expected to be at least 50% smaller than they were in the 30 years prior to the financial crisis. So not only are people finding it harder to put money away at the end of the month they are also finding that those savings are growing more slowly.

While political and economic uncertainty is making retirement planning harder, life expectancy is continuing to rise. By the year 2020, women aged 65 are expected to live to the age of 90 – almost 30% longer than they were expected to live in 1990. As a result of such gains, and even with the Government’s proposed changes to the State Pension age, people are likely to need sufficient savings in order to fund up to a third of their adult life in retirement.


Given this backdrop, a new Pensions Commission is urgently needed in order to look at the problem of retirement income adequacy in a holistic way and to bring back some certainty about the future direction of pensions policy in the UK built on consensus. This is why the first Pensions Commission which reported on its findings a decade ago, was seen as so successful – taking the necessary time and effort to build a detailed evidence base and develop widespread consensus on the appropriate direction of travel.

The blueprint for a new Commission

The Commission should: • Be set up with cross-party support.• Place a central focus on ensuring adequate retirement incomes for the long term.• Specifically focus on:

1) defining target outcomes for retirement savings and extending working lives. 2) developing a mechanism to regularly monitor progress against these targets. 3) consulting and ultimately deciding on whether new policy reforms are needed.

• The Commission should seek to set out the rights and responsibilities of individuals, employers and government with respect to long term retirement income adequacy.

• Report to the Secretary of State for Work and Pensions, the Chancellor of the Exchequer and the Prime Minister.

• Be headed by a group of 4 experts from; academia, charity sector, industry and employees.

Overall approach

The central purpose of any future Pensions Commission must be focused on the core goal of ensuring adequate retirement incomes for people in the UK.

Specific remit

In order to achieve its central aim, the Commission should be given a remit to; 1) define target outcomes for retirement savings and extending working lives 2) develop a mechanism to regularly monitor progress against these targets and 3) consult and ultimately decide on whether new policy reforms are needed. In this way, the commission should seek to set out the rights and responsibilities of individuals, employers and government with respect to long term retirement income adequacy. At each stage of the process, the Commission must have regard to how the wider macroeconomic and political environment is likely to impact on the Commission’s aims and adjust its thinking and judgements accordingly.

Consensus building via consultation

To deliver on its remit, the Commission must be able to build political consensus via broad consultation. Such consultation should not just relate to calling for written and oral evidence but also an active commitment from Commission members to visit and speak to key stakeholders in the debate including; political parties, consumer groups, employers, charities, the financial services sector, think tanks and more. This multifaceted consultation process should not just be a one-off, but must be an iterative process that is ingrained into each stage of the Commission – from evidence gathering to reporting its final recommendations. This way, by the time the Commission reports its findings, it already has buy-in from the stakeholders who could make or break the Commission’s proposals for further action.

Who should lead and staff the Commission?

To ensure that the Commission is independent but able to build consensus across multiple fronts, the Commission should be led by four widely respected, but non-political experts representing academia, the


charity sector, employees and industry. It should also have a small administrative, research and policy team to support its work drawn from different backgrounds and sectors.

Who should the Commission report to?

The Commission must carry sufficient weight politically to ensure that its findings and proposals are taken seriously by Government. For this reason, the Commission should be independent but must report to the Secretary of State for Work and Pensions, the Chancellor of the Exchequer and the Prime Minister. This should help to ensure that it is able to cut across competing departmental priorities. To facilitate a period of stability in pensions policy, no major new policies should be enacted until the Commission has reported its findings.

Over what timeframe should it report?

Given the scale of the recent reforms to pensions policy coupled with the economic and financial challenges facing households, there is a need to set up an independent Commission as soon as possible after the General Election. However, in order to allow the current set of reforms to bed-in and to ensure at least short to medium term stability in pensions policy, the Commission should not set out any final proposals until 2017 at the earliest. As a result, we think that the Commission could replace the currently planned 2017 review of Auto-Enrolment. This should also give it the appropriate amount of time to consult widely and to develop a detailed evidence base from which it can make informed judgements about what additional policy measures might need to be taken.

Should it have an ongoing commitment to review pensions policy?

In our view, the Commission should not have a rolling commitment to review every few years but should be a one-off. We think a regular commitment to review pensions policy could actually undermine a key reason for having a Commission in the first place – to ensure a period of stability and coherence in policymaking. Instead, the Commission should set the agenda for the next 10 years and specify how progress should be monitored over the medium to long term. Eventually, such a monitoring role could be undertaken by the DWP, but only after the Commission has set the appropriately agreed targets and methods of measurement.

What issues might the Commission want to consider?

While it would be up to the Commission itself to decide what issues it ultimately focuses on, this report highlights a number of areas where such a body could provide valuable insight:

Increasing savings levels

• Monitor pension contribution levels and consider whether they should be raised over time.

• Assess whether the existing focus on increasing defined contribution (DC) pension pot holdings through AE is sufficient or whether more radical policy measures (i.e. compulsion/tax incentives/expansion of ISAs) are necessary.

Helping people work longer

• Monitor progress in extending working lives and consider whether there is a case for new government policies to support longer working.

• Feed into the review of SPA through evidenced based analysis about its effectiveness in extending working lives and its distributional impact across social groups.

Understanding how long term care and intergenerational differences will impact adequacy

• Consider the growing prevalence of paying for long-term care as part of the overall challenge of securing an adequate income in retirement.

• Consider how retirement income adequacy might differ by generation and whether certain age cohorts need more specific types of support than others.

Have regard to the impact of macroeconomic forces on retirement income


• Consider how the wider macroeconomic environment may affect retirement incomes in the short, medium and long term.

• Re-evaluate assumptions about future investment returns and how these may affect retirement income.

Have regard to the public policy realities facing officials

• With age-related government spending set to rise and the UK’s economic future uncertain, the Commission can play an important role in assessing how pensions policy may affect the sustainability of government finances over the long-term.

• Understand, and, if possible, try to reconcile the trade-offs between policy which seeks to drive up savings and policy which seeks to stimulate economic growth.


Introduction

A decade ago the Pensions Commission, led by Lord Turner and reporting to the Secretary of State for Work and Pensions, outlined its observations on how the UK’s pensions system was developing and whether changes were needed in order to ensure adequate incomes for future pensioners1. A key part of its remit was to consider whether the pensions system should move beyond its “voluntarist approach” whereby people have the choice about whether or not to make provision for retirement. The Commission was largely heralded a success with a number of its key recommendations taken forward including raising State Pension age, Auto-Enrolment of private sector workers into occupational pension schemes and encouragement of longer working lives. But the world has moved on since Turner’s report, with a wave of policy measures enacted over the last 5 years at a time when saving for retirement has become increasingly hard. The fall-out from the financial crisis has put pressure on household budgets making it harder to put money away at the end of the month, and when households do manage to save, returns are often flat or negative after accounting for rising living costs. We therefore find ourselves in a new world of constant policy change coupled with an economic environment which is far from conducive to growing long term savings. All the while, life expectancy continues to rise, putting pressure on age-related government spending as well as pension funds which are paying out over increasingly extended periods. According to our calculations, women are now expected to live for more than 25 years in retirement and men for over 20 years (see below chart). For men in particular, the length of time spent in retirement has significantly increased - by more than one third over the last 30 years.

Figure 1: Approximate amount of time spent on average in retirement (1984-2012)

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1 The Final Report of the Pensions Commission (2006) http://www.webarchive.org.uk/wayback/archive/20070802120000/http://www.pen-sionscommission.org.uk/publications/2006/final-report/index.html


Given the ever evolving policy environment, the challenging economic and public policy backdrop and rising life expectancy, it is a good time to consider whether a new Pensions Commission is needed to assess the challenges and strategic direction of future pensions policy in the UK. With this aim in mind, this report is split into 5 chapters:

1. Discussion of recent changes in pensions policy.

2. An overview of progress since the Turner Commission regarding:§Household savings.§Participation in occupational pension schemes.§Extending working lives.§Government expenditure on older people.

3. A look at the current economic environment and how this is impacting on household savings.

4. Summarising the case for a new Commission.

5. A blueprint for what a new Pensions Commission should look like.

In the spirit of the original Pensions Commission, this paper relies heavily on analysis of official statistics in order to build an evidence base about the current and future challenges associated with securing adequate retirement incomes in the UK. Based on this analysis, at the beginning of each chapter, we include a bite-sized overview of why a new Commission might be needed and what its role might be.

In order to help inform this report, we held a highly informative round table debate. We are extremely grateful for the comments that we received which have helped to shape our thinking, but the approach, contents and findings of the final report are solely the responsibility of the author.


1.Policy contextThe case for a new Commission: given so many big changes to pensions over the last 5 years, there is a need to take stock and to only make further recommendations if they are carefully considered and based on consensus across key stakeholders.

2015 marks the 10th Anniversary of the publication of the Pensions Commission report. Since this time, there have been a number of policy changes that have affected the pensions landscape, some of which were first proposed by the Pensions Commission and some of which were not.Auto-EnrolmentAuto-Enrolment (AE) was a key pillar of the Pensions Commission’s recommendations as a way of overcoming the behavioural barriers to long-term saving by automatically opting people into workplace schemes, while leaving them ultimately free to make their own decisions including opting out if they wish2. This has been one of the biggest ever changes to the accumulation side of private pensions, which has, so far at least, been perceived as a remarkable success, with just 12% of people opting out. It therefore looks as though it may deliver on its promise of bringing an additional 9 million people into long term savings. But a number of significant challenges remain. First, we do not yet know how small and micro firms will cope with AE – will they suffer from higher opt out rates than their larger counterparts? Second, will people remain in schemes over the long-term, especially as minimum contribution levels increase while real disposable income growth remains stagnant? Third, and possibly the biggest challenge of all, how do we ensure that people save more than the 8% minimum given this level of saving is unlikely to deliver an adequate income in retirement for many? While the beginning has been bright, there remains a long and potentially rocky road ahead. Changes to State PensionThe original Pensions Commission argued that the State Pension age should rise over the long-term as life expectancy rises. It also argued that any rises in SPA should be part of a package whose overall impact is fair, allowing for differences in life expectancy by socio-economic group, and which is accompanied by policies to support flexible retirement and later working.Since the Commission’s findings, the Government’s plans to increase State Pension Age (SPA) have been achieved with little political opposition or social protest which is in great contrast with experiences on the continent. These changes will see the equalisation of male and female State Pension ages, before a gradual increase for both so that people spend, on average, no more than a third of their adult life drawing on a State Pension. But there are questions about whether the current planned increases in SPA are sufficient to limit the rise in future government liabilities related to the State Pension given continuing rises in life expectancy. There are also concerns that the planned rises in SPA will exacerbate inequalities across groups and regions which would run counter to the view from the Commission that the overall impact of the rise in SPA should be “fair”3. Alongside the planned changes to SPA, the Government is also introducing a new “flat rate” State Pension which is potentially more generous than the current arrangement but entitlement will still depend on someone’s lifetime National Insurance contributions. Recently it has become public knowledge that despite the shift to a “flat rate” State Pension, it is estimated that less than half of people who retire between 2016-2020 will receive the full State Pension under the new arrangements though this will rise to 81% by 2035 as people build up entitlement under the new system4. 2 The Final Report of the Pensions Commission (2006) http://www.webarchive.org.uk/wayback/archive/20070802120000/http://www.pen-sionscommission.org.uk/publications/2006/final-report/final_report.pdf 3 Sinclair et al (2014) “Linking state pension age to longevity: tackling the challenge of fairness, report by ILC-UK, http://www.ilcuk.org.uk/images/uploads/publication-pdfs/Linking_state_pension_age_to_longevity.pdf 4 Hyde and Morley (2015) “Less than half of workers will get full ‘flat rate’ state pension”, article for the Daily Telegraph: http://www.telegraph.co.uk/finance/personalfinance/pensions/11338434/Less-than-half-of-workers-will-get-full-flat-rate-state-pension.html


Extending working livesA key pillar in helping to achieve a secure income in retirement is increasing the average age of exit from the workforce – and this was also an area the Turner Commission explored. Over recent years we have witnessed growing participation in the workforce by older people. There are now over a million people working at 65 or above. The Government has introduced an older workers strategy and appointed a Business Champion for older workers. The Government has also abolished the default retirement age and has introduced other policies in relation to flexible working and workplace health. However, despite recent developments, progress in extending working lives has been relatively slow. To put this in context, in the 1960s, employment rates of older workers were at a record high, with 9 out of 10 men in employment aged 60-64. Today, just over 1 in every 2 men aged 60-64 is employed5.Public sector pension reformsAlongside the changes to private sector pensions, the Government has also taken on board many of the changes proposed by the Independent Public Service Pensions Commission6. As a result, many public sector pensions have stopped accruing on a “final salary” basis and shifted to a “career average” basis. Meanwhile future pensions will have a pension age equivalent to State Pension Age and tiered contribution rates have been introduced, so that higher earners contribute at a higher rate than lower earners. While the changes to public sector pensions are likely to reduce the extent to which public sector pension scheme liabilities grow and therefore improve their sustainability, the changes are also likely to result in lower replacement rates for public sector workers in future. New pension freedomsTaken together, the above changes alone would represent a frightfully busy schedule, but the Government has gone even further. In March 2014, the Chancellor announced liberalisation of the “at retirement” market so that people with Defined Contribution (DC) pension pots could choose to spend their pension as they wished rather than being “forced” to annuitise as had generally been the case before. This will be supported by the so called Guidance Guarantee – a system of free financial guidance provided by Citizens Advice Bureau and The Pension Advisory Service to help people make informed choices about what to do with their DC pension wealth. Some Defined Benefit (DB) pension scheme holders will also be able to take advantage of the new pensions freedoms by transferring their DB wealth to a DC scheme subject to taking professional financial advice. With an estimated 320,000 people retiring each year with a DC pension7 and evidence from other countries suggesting that people have a tendency to squander their hard earned savings in the face of such flexibilities, there is a significant risk that some people will suffer from reduced incomes in retirement. There is also a question about whether AE and the new pension freedoms are easily compatible – with the former concerned with ensuring people build up sufficiently large private pots to help fund retirement, whereas the latter risks people spending all their DC wealth too soon and therefore foregoing some income for the duration of retirement. Long-term care While not specifically related to pensions, the Government’s reforms to long-term care will have significant knock-on effects for retirement planning, as care is one of the biggest costs some individuals will have to face in retirement. Passed in 2014, the Care Act will shape the way in which

5 Ben Franklin et al (2014) “The Missing Million” Report for the ILC-UK, PRIME and BITC: http://www.ilcuk.org.uk/images/uploads/publica-tion-pdfs/The_missing_millions_web.pdf 6 Independent Public Service Pensions Commission: Final Report (2011): https://www.gov.uk/government/publications/independ-ent-public-service-pensions-commission-final-report-by-lord-hutton 7 HM Treasury Budget 2014: greater choice in pensions explained


people receive long-term care in the UK and how they will pay for it. The Act contains a number of key elements, but perhaps the most dramatic are the minimum eligibility threshold – a set of criteria that should make it clearer when local authorities will have to provide support, and the introduction of a cap on care costs and an extended means test – both of which should result in more people receiving financial support from the State. While more financial support and less of a post-code lottery are to be welcomed, it remains the case that many individuals will face significant costs if they need care and the complexities associated with the new funding arrangements, combined with the somewhat arbitrary divide between health (which is free at the point of use) and care (which is not) will continue to make planning for the future very challenging. Returning to consensus policymakingIrrespective of the merits of some of these reforms, there is an emerging view that the Government has moved away from the consensus policymaking environment developed by Lord Turner. The Pensions Commission argued that the UK had three options if we are to appropriately respond to the challenges of providing adequate retirement incomes in an ageing society. These were: 1) encouraging higher levels of saving, 2) more government spending, and 3) extended working lives. The Commission argued that all three were likely to be necessary and pointed towards a fourth undesirable scenario – if no action was taken the inevitable result would be significantly poorer pensioners. Clearly there have been numerous public policy responses on many different fronts, but there is now an urgent need for a deep breath and a careful consideration of the situation the UK finds itself in 10 years on from Lord Turner’s report.


2.Progress since the Turner Commission

While there is evidence that some progress has been made towards meeting the aims of the Pensions Commission, securing retirement income adequacy for the many and not just the few will remain a significant challenge. This is because, in the short to medium term at least, household savings have stagnated, there are significant limitations on government funding for retirement and more support is needed to extend working lives. Below we explore the progress that has been achieved in each of these areas. Saving more…not yetThe case for a new Commission: Given little growth in household savings and pensions scheme membership, there is a need to assess whether the existing focus on increasing DC pension pot holdings through AE is sufficient or whether more radical policy measures (i.e. compulsion/changes to taxation policy) might be necessary.

At an aggregate level, the financial crisis had a marked effect on savings in the UK. After initially falling to a ten year low in 2008, gross savings per person doubled in the space of two years, peaking at nearly £2,000 per person in 2010. This rise is likely to have been driven by increased precautionary savings, as individuals chose to delay consumption in light of continuing and significant economic turmoil. But since that time, savings per person have fallen back to pre-crisis levels of closer to £1,000 (figures not adjusted for inflation). The rise in savings seen in 2009 and 2010 therefore appears to have been a temporary response to the crisis rather than a significant shift in the behaviour of households. The downward shift in savings since 2010 has also been exacerbated by falling real incomes which have made it harder for individuals to put money away at the end of the month.

Figure 2: UK: Gross savings per head: 1997-2013

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The automatic enrolment effect…Using data since the 1950s it is possible to see just how far pension scheme membership was falling prior to the introduction of Auto-Enrolment. Looking over the longest official time series available, there was a marked increase in the number of active members between 1953 and 1967 from 6.2 million to 12.2 million, followed by an almost continuous decline between 1967 and 2012 to 7.8 million. However in 2013, occupational scheme membership rose to 8.1 million as the phasing of Auto-Enrolment took effect.


Figure 3: Active members of occupational pension schemes, 1953 to 201313121110

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1.The 2005 OPSS did not cover the public sector.2.Changes to methodology from 2006 onwards mean that comparisons with 2005 and earlier should be treated with caution.

Despite this initial success of AE, there is still much to be done. To put the latest developments in perspective, according to ONS calculations, only half of all employees are currently contributing to an occupational pension scheme and this falls to less than 4 in 10 working in the private sector (and approximately 3 in 10 women). The success of AE in terms of boosting the number of savers may also be tempered by the rise of self-employment (which now accounts for 15% of total employment in the UK) and zero hours contracts (which accounts for 2% of total employment)8. People in both types of work are unlikely to be saving into an occupational pension scheme but will need to secure sufficient savings for an adequate retirement income. Figure 4: Employee membership of a workplace pension: by sex and sector, 1997 to 2013 (%)

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1. Active membership of a pension that is arranged through an employer, main pension only.2. Results for 2005 (the first dotted line) are based on a new questionnaire and may not be comparable with earlier results.3. Between 2008 and 2009 (the second dotted line) Lloyds Banking Group, the Royal Bank of Scotland Group and HBOS plc were reclassified from the private sector to the public sector.4. In 2011 (the third dotted line), ASHE replaced the Standard Occupational Classification 2000 (SOC 2000) with the Standard Occupational Classification 2010 (SOC 2010). The change to SOC 2010 has affected the survey weighting. The estimates for women in the private sector have changed (by less than one percentage point) as a result of this adjustment. The download file for this chart includes 2011 estimates on both the SOC 2000 and the SOC 2010 basis.

8 Self-employment figures as at Q3 2014, zero hours figures as at Q2 2014. All data from Office for National Statistics.


Contributions, contributions…

The case for a new Commission: the minimum contribution level for AE will not be enough to deliver adequate retirement incomes for the masses. A Commission would therefore be the ideal body to monitor contribution levels and consider whether and how minimum contributions levels should be raised over time.

With DC pensions likely to be the main long-term savings vehicle going forwards, it is essential that individuals and employers invest enough money into the pension in order for it to deliver an adequate retirement income. The problem is that over the last decade, contribution rates into DC schemes have remained stagnant and even fell slightly in 2013. According to the ONS, this recent fall in employer contribution rates for DC schemes may be linked to the impact of the workplace pension reforms. They argue that “whilst it is not possible to isolate the effect of these reforms, an increase in the number of new members starting pensions on the minimum contribution rates would lower the average rate. The fall may also be due to employers reducing contributions into existing pensions, referred to as ‘levelling down’”9 though it should be noted that the DWP dispute this10. Whatever the reason for the year on year fall, employer and employee contributions into DC schemes are going to have to rise from their current low base. On average, employees contributed just 2.9% of their salary to a DC pot in 2013 by comparison to 5.9% for members of DB. But it is with regard to the employer contribution where the difference is starkest – just over 6% for DC schemes but over 15% for DB schemes. These large differences between DB and DC contributions have remained constant over a number of years (see chart).

Figure 5: Contribution rates since 2007 by type of occupational pension

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If under Auto-Enrolment employers decide to pay the minimum amount in and individuals do not increase their contributions, many people will still be highly reliant on other sources of income including the State Pension to fund their living costs in retirement and even then this value may not equate to an “adequate” income. Modelling undertaken by the Pensions Policy Institute has suggested that the minimum 8% contribution stipulated under Auto-Enrolment would fail to deliver adequate incomes for many in retirement. Less than half of median earners would be able to meet their target replacement rate (equivalent to having about 2/3rds of their pre-retirement income replaced in retirement)11. 9 Office for National Statistics (2014) Pension Trends – Chapter 8: Pension Contributions: http://www.ons.gov.uk/ons/rel/pensions/pen-sion-trends/chapter-8--pension-contributions--2014-edition/art-chapter-8--pension-contributions--2014.html#tab-Private-sector-occupation-al-pension-contribution-rates10 Department for Work and Pensions (2013) “Employers’ Pension Provision Survey 2013”: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/330512/rr881-employers-pension-provision-survey-2013.pdf 11 Pensions Policy Institute (2013) “What level of pension contribution is needed to obtain an adequate retirement income?”: http://www.pen-sionspolicyinstitute.org.uk/uploaded/documents/20131022_ae_adequacy_final_report.pdf


Figure 6: Probability of achieving the target replacement income varies by earning level

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Younger generations will find it harder to secure an adequate retirement income

The case for a new Pensions Commission: An independent Commission is well placed to consider how retirement income adequacy might change over generations and whether certain cohorts need more support than others.

For younger age groups the chances of securing an adequate income in retirement is likely to be lower than for older cohorts. A report by the Institute for Fiscal Studies, found that individuals born in the 1960s and 1970s are likely to be reliant on inherited wealth if they are to be any better off in retirement than their predecessors. The authors argue that when compared with those born a decade earlier at the same age, the younger cohorts have no higher take-home income; have saved no more previous take-home income; are less likely to own a home; are likely to have lower private pension wealth; and will tend to find that their state pensions replace a smaller proportion of prior earnings12. And for those in their 20s and 30s, the chances of securing an adequate income in retirement could be lower still given that many have been affected by a decade of low earnings growth exacerbated by the financial crisis, have not been able to invest in a private sector final salary pension, are more likely to hold multiple jobs over their lifetimes and are finding it tougher and more expensive to get on the housing ladder.

Figure 7: Percentage of each group that are homeowners

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12Hood and Joyce (2013) “The economic circumstances of cohorts born between the 1940s and the 1970s”: Report for the Institute for Fiscal Studies: http://www.ifs.org.uk/publications/7007 13 ONS (2015) “Housing and home ownership in the UK”: http://visual.ons.gov.uk/uk-perspectives-housing-and-home-ownership-in-the-uk/


Working longer…The case for a new Commission: Given the significant but slow progress in extending working lives, the Commission could help to provide new impetus, playing an important role in monitoring progress and considering whether radical policy initiatives are needed.

While the original Pensions Commission argued that people would need to work for longer, it was always expected to be a slow burner. There is however, evidence of some progress in this regard despite the economic turmoil since 2008. Indeed, one of the defining features of the recent labour market recovery has been the extent that “older” workers have contributed towards it. From Q1 2008 to Q3 2014, the number of workers aged 50-64 has increased by 842,000, while the employment rate for this age group has risen from 65.7% to 68.8%. Similarly for those aged over 65, the number of workers has increased by 437,000, while the employment rate has risen from 7.2% to 10.1%14. Despite such progress it is worth highlighting that only 1 in 10 people aged over 65 are in work. A more detailed analysis of the so called “retirement cliff edge” reveals that the percentage of people in employment in their early 50s is quite high (over 80%) but then there is a steep decline in the employment rate between people in their mid-50s to mid-60s so that by age 67, the employment rate is just 18 percent15. Figure 8: Employment rate by type of employment and by age

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Source: ONS Labour Force Survey (Q1 2014) and author's calculation

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Research from the ILC-UK has shown that the over 50s continue to face a number of unique labour market challenges which means that the fall in the employment rate by age is not just the result of people reaching SPA, but also because the over 50s are more likely to be involuntarily pushed out of the labour market than any other group. Once they have been pushed out they find it harder to get back in hence why economic inactivity levels are so high for the 50-64 age group16. In summary, then, while there is evidence of progress, much more work and momentum is needed in order to support longer working lives in the UK.

14 ILC-UK calculations using ONS (2014) Q3 Labour Market Statistics Database15 Franklin et al (2014) The Missing Million: Report for BITC, PRIME and ILC-UK http://www.ilcuk.org.uk/images/uploads/publication-pdfs/The_missing_millions_web.pdf 16 Ibid


Will the planned rises in SPA be sufficient?The case for a new Pensions Commission: A new commission would be ideally placed to feed into the review of SPA through evidenced based analysis about its effectiveness in extending working lives and its distributional impact across social groups.

…is SPA rising fast enough to keep up with longevity?The Government has put forward a timetable for raising the State Pension Age as part of a package of measures to incentivise longer working lives and limit the extent of the anticipated rise in public expenditure on pensioner benefits. Under current proposals, SPA for men and women will rise to 66 by 2020, 67 by 2028 and is then likely to rise to 68 by 2036 and 69 by the late 2040s. But even with these changes, individuals will be spending an increasing number of years in retirement. To illustrate this, on the chart below we plot the extent to which SPA would need to rise in order to ensure that men spend the same amount of time in retirement over the next 50 years as they do today. This approach would imply that SPA should be raised earlier so that by the year 2044 SPA should be 70 rather than 68 (see chart). Figure 9: State Pensions ages for different scenarios

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Source: ONS, DWP and author’s calculations

It is worth adding that all these numbers are derived from the ONS’ principal population projections for the UK – under a plausible scenario where life expectancy rises faster than currently anticipated, SPA could hit 70 by the late 2030s17. …the distributional impact could be significantRegardless of whether the proposed rises in SPA are likely to be sufficient at an aggregate level, different groups will be affected in different ways. Life expectancy is a measure of quantity of life and is significantly longer than measures of quality of life such as healthy life expectancy and disability-free life expectancy. But these quality of life measures vary significantly by region and social class, which means that particular groups are more likely to be disadvantaged by a rise in the SPA than others. Some groups will therefore not be entitled to a State Pension even after they reach the end of their healthy life because they have not yet reached the revised SPA. In this regard, increasing SPA into ages where disability rates are higher, also raises concerns about transferring spending from the State Pension to disability and unemployment benefits18.

17 Office for Budget Responsibility (2014) “Fiscal Sustainability Report” http://budgetresponsibility.org.uk/pubs/41298-OBR-accessible.pdf 18 Moore et al (2014) “Linking State Pension Age To Longevity”, report for the ILC-UK: http://www.ilcuk.org.uk/images/uploads/publication-pd-fs/Linking_state_pension_age_to_longevity.pdf


What about long-term care?

The case for a new Pensions Commission: A future Pensions Commission would be amiss not to consider the need to pay for long-term care as part of the overall problem of securing an adequate income in retirement.

Questions about the adequacy of retirement income are often, and wrongly in our view, divorced from questions about the funding of long-term care. This artificial separation is spurious because one of the key costs that people will face in retirement is long term care and in particular, many could face very high costs if they enter residential care. We know that on average around one in three women and one in five men aged 65 will enter a care home at some point in the future and the risk of entering residential care increases as people get older19. Currently, the average cost in England for a residential home is £29,016 per annum compared with £38,376 per annum for a nursing home20. Despite current proposals to “cap” the cost of care at £72,000 and increase the means test to £118,000, which will see more people receive public funding for care, many will still have to pay significant costs towards their care in future. Clearly pensions can play a part in meeting these costs – though many will also have to tap into other assets to plug any remaining funding gap.

Government spending on age-related services

The case for a new Commission: With age-related government spending set to rise and the UK’s economic future uncertain, the Commission can play an important role in assessing how pensions policy may affect the sustainability of government finances over the long-term.

Age-related government spending has been on the rise for some time in response to a growing older population. But it is important to not just look at the absolute numbers but how they relate to national income or GDP in order to understand the extent to which age-related spending is sustainable. In summer 2014, the ILC-UK produced a Factpack which detailed how age-related spending has changed over the last 60 years and how it might change going forward. Below are some of the main findings.

State pensions• In 1948, the UK spent £4.6bn on state pensions. By 2013 this had risen to £84.9bn.• In 2012/13, spending on the state pension accounted for 48% of total benefit spending, but

this is less than in the 1970s when spending on the state pension accounted for over 50% (during the years 1973-78) and in the 1960s (see chart overleaf)21.

19 The Commission on Funding of Care and Support (Dec 2010), Call for evidence on the future funding of Care and Support20 Laing and Buisson (2014) Care of Older People – UK Market Report21 DWP (2014) Benefit expenditure and caseload tables:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/310483/outturn-and-forecast-budget-2014.xls


Figure10: State expenditure as % of total benefits (2013/14 prices)

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State pension expenditure as % of total benefits (projected)

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Total pensioner benefits• Earliest official figures for total spending on pensioner benefits date back to 1978. At that time,

the UK was spending £38.9bn on pensioner benefits. By 2013 this had risen to £113.1bn.• In 2013, total pensioner benefits accounted for an estimated 66% of total benefit spending.

This compares to an average of 57% over the entire period since 1978. It is forecast to rise to 69% by 2018.

• In 2013 pensioner benefits were equivalent to 6.7% of GDP. This compares with an average of 5.9% per annum since 1978 (see chart) 22.

Figure11: Pensioner benefits as a proportion of GDP

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Looking to the future…The economic forecasting agency the Office for Budget Responsibility publishes its long-run forecast for government spending once a year. In the 2014 addition, it predicted: • Health spending rises from 6.4 per cent of GDP in 2018-19 to 8.5 per cent of GDP in 2063-64,

rising smoothly as the population ages. • State pension costs increase from 5.5 per cent of GDP in 2018-19 to 7.9 per cent of GDP in

2063-64 as the population ages.

22 DWP (2014) Benefit expenditure and caseload tables:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/310483/outturn-and-forecast-budget-2014.xls


• Long-term social care costs rise from 1.2 per cent of GDP in 2018-19 to 2.3 per cent of GDP in 2063-64, reflecting the ageing of the population and the Government’s announcement of a lifetime cap on certain long-term care expenses incurred by individuals.

• By 2063-64 it is estimated that total age-related spending will equal 25.1% of GDP by comparison to 20.4% in 2018-19. Spending on education, other welfare benefits and other items will remain broadly level over this period23.

Table 1: OBR spending projections

Per cent of GDP Estimate1 FSR Projection

2013-14

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212023-

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342043-

442053-

542063-

64

Health 7.9 6.4 6.5 6.7 7.5 8.0 8.4 8.5

Long-term care 1.2 1.2 1.4 1.4 1.7 2.0 2.2 2.3

Education 5.3 4.3 4.3 4.4 4.3 4.2 4.2 4.2

State pensions 5.8 5.5 5.4 5.7 6.7 7.4 7.6 7.9

Pensioner benefits2 1.0 0.8 0.8 0.8 0.9 1.0 1.0 0.9

Public service pensions 2.2 2.2 2.1 2.1 1.9 1.6 1.4 1.2

Total age-related spending 23.3 20.4 20.6 21.2 23.0 24.2 24.8 25.1

Other welfare benefits2 5.8 5.2 5.3 5.3 5.2 5.2 5.3 5.3

Other spending2 11.4 8.6 8.7 8.5 8.5 8.5 8.7 8.7

Spending3 40.5 34.3 34.5 35.0 36.7 37.9 38.8 39.11 Spending consistent with the March 2014 Economic and Fiscal Outlook. 2 Last year’s pensioner and welfare benefits projections included council tax benefit. This has now been devolved to local authorities, and so is excluded from our benefits projections, and is now implicitly included in ‘other spending’.3 Excludes interest and dividends.

…if GDP undershoots expectations it would reduce the sustainability of age-related spendingGiven the future projected rises in spending on older people as a proportion of GDP, it is perhaps unrealistic to assume that the Government will continue to increase pensioner benefits over the long-term. More likely, the onus will be increasingly on the individual to ensure retirement income adequacy. In this regard, there is an important caveat – future growth may significantly undershoot expectations raising the prospect of higher ratios of public spending as a proportion of GDP. The OBR use the UK’s average rate of productivity growth during the years 1971-2008 (2.2%) to determine the future productivity of the UK’s workforce which is then used to calculate long-run GDP. But, as the following chapter argues, we may significantly undershoot these expectations if we are, as some propose, gripped by a “new normal” of relatively low growth, low inflation and low investment returns. In summary, while there is evidence of some progress being made in terms of increasing the number of savers, extending working lives and plugging personal retirement funding gaps through pensioner benefits, substantial progress is still required if we are to secure adequate retirement incomes for future generations.

23 Office for Budget Responsibility (2014) Fiscal Sustainability Report http://budgetresponsibility.org.uk/fiscal-sustainability-report-july-2014/.


3. Economic context

The case for a new Commission: Future pensions policy must not be developed in isolation of the economic and political realities of our time. A Pensions Commission would therefore be ideally placed to consider how the wider macroeconomic and public policy landscape may affect retirement incomes in the short, medium and long term.

…debt driven recovery undermines saving for the futureThe economic environment will continue to shape the savings and investment decisions that people make. The financial crisis of 2008 and the public policy responses to it continue to make it a challenging environment to grow savings and to make a positive real return on investments. There is no sign of this challenging environment abating any time soon. Our own calculations derived from the Office for Budget Responsibility’s latest forecasts suggest that future growth is likely to be driven by increasing household indebtedness as consumption rises without being accompanied by a rise in real incomes. Consequently, the UK savings ratio is expected to fall to its lowest level since 1997 – lower even than in the pre-crisis days of 2007.

Figure 12: Revisions to OBR debt to income projections since Dec 2012

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…the search for high return investments could leave retirees exposedWhile economic growth has finally picked up, the UK’s level of economic output remains 15% below the level implied by its pre-crisis trend rate of growth. The recovery has therefore been even slower than during the Great Depression of the 1930s despite the enormous monetary stimulus undertaken by the Bank of England. The protracted economic recovery as well as the BoE’s actions have forced interest rates on debt down which has been good for borrowers but bad for those looking to accumulate savings as well as for those seeking to annuitise – a product whose value depends on the yield associated with long-dated UK government bonds.

Figure14: Gilt yeilds in response to exceptional monetary policy conditions

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According to the International Monetary Fund’s 2014 Global Financial Stability Report, the current low interest rate environment is promoting “excessive financial risk taking” as investors search for assets offering positive real returns. They argue that “although economic benefits of monetary ease are becoming more evident in some economies, market and liquidity risks have increased to levels that could compromise financial stability if left unaddressed”24. The answer, according to the IMF is to provide well-designed macro prudential measures (financial regulation aimed at reducing risk of systemic failure) that target areas at risk without undoing the benefits to be gained from loose monetary policy for the real economy. But clearly this is easier said than done given the absence of any substantial historical precedent for the use of macro prudential tools. The “search for yield”, as it is sometimes termed, poses the potential of significant consumer harm if individuals find themselves (either intentionally or otherwise) exposed to highly volatile assets during retirement which could leave them with sudden and significant income shortfalls. …into the “new normal”

The case for a new Pensions Commission: A new Commission may be ideally placed to consider whether there is a need to re-evaluate assumptions about future investment returns and how these may affect income adequacy in retirement.

While some think that the low growth, low interest rate environment is a temporary manifestation of the global financial crisis, others disagree. There are some very well respected academics and policymakers who think we have entered a new normal and may be likely to experience these

24 International Monetary Fund (2014) “Global Financial Stability Report: Risk Taking, Liquidity, and Shadow Banking: Curbing Excess While Promoting Growth”: ” https://www.imf.org/external/pubs/ft/gfsr/


conditions for many more years to come. Though economists are yet to agree on the reasons for what some have described as “secular stagnation”, there are good arguments to believe that the current environment is not a blip, but a taste of the future. - Technology: Technological progress has not stopped but has slowed and this is going to

reduce long run potential growth in labour productivity. - Demography: The population is stagnant and life expectancy is continuing to increase.- Education: The mass education revolution is complete, no further increase in the average

education level across advanced economies is to be expected.- Inequality: The raising share of the top 10% of the income distribution has deprived the middle

class of income growth since 1980.- Public debt: The gloomy outlook for public debt makes current public services unsustainable.- Deficient demand: When a debt-financed bubble bursts, firms and households simultaneously

attempt to pay down their debt. While sensible at the individual level, the result is an enduring lack of aggregate demand25.

A world of long-term stagnant growth and low interest rates would represent a significant challenge for everyone involved in long-term savings. According to leading academics; Dimson, Staunton and Marsh, “the projections made by many asset managers, retail financial product providers, pension funds, endowments, regulators and governments are optimistic” because they are based on the abnormally high returns world of the 30 years prior to the financial crisis26. In this regard, the academics are concerned about the “wishful” and “optimistic” assumptions being used by the DWP to calculate the impact of Auto-Enrolment on the prospective wealth of tomorrow’s pensioners27. They believe that “overly optimistic estimates of future returns are dangerous, not only because they mislead, but also because they can mask the need for remedial action”28. Figure15: Likely returns in a low-return world

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Source: Elroy Dimson, Paul Marsh and Mike Stauton, DMS database

25 Tuelings and Baldwin (eds.) “Secular Stagnation: Facts, Causes and Cures”, A VoxEU.org Book: http://www.voxeu.org/sites/default/files/Vox_secular_stagnation.pdf 26 Marsh, Dimson and Staunton, “Lower your expectations to the new normal”, Article for the FT: http://www.ft.com/cms/s/0/be436e04-9de6-11e2-9ccc-00144feabdc0.html#axzz3Onn480Nv 27 Credit Suisse (2013) “Global investment returns yearbook 2013” 28 Marsh, Dimson and Staunton, “Lower your expectations to the new normal”, Article for the FThttp://www.ft.com/cms/s/0/be436e04-9de6-11e2-9ccc-00144feabdc0.html#axzz3Onn480Nv


…public policy dilemmas in a stagnant world

The case for a new Pensions Commission: An independent Commission may be well placed to identify how pensions policy can fit into the wider public policy context including trying to reconcile the trade-offs between policy which seeks to drive up savings, and policy which seeks to stimulate economic growth.

While it is ultimately impossible to know whether we are in the midst of a Japan-style “Lost Decade” which could last another 10 to 20 years or more, the argument that there is something different about the current economic environment is difficult to refute and it is presenting significant headaches for policymakers. The choices that they make will affect everyone and have substantial implications for savers and investors.

- Should and how quickly does Government reduce the UK’s public debt burden without derailing the recovery and diminishing essential services?

- How can policy makers encourage economic growth against a backdrop of spending cuts and interest rate rises (presumably rates will rise to some extent even if not to levels seen in the early 2000s)?

- To what extent and how quickly should central banks reverse monetary stimulus?- How can central banks and regulators reduce the financial stability and conduct risks

posed by asset price bubbles?These substantial public policy dilemmas were not present during the Pensions Commission a decade ago, but, depending on the choices officials make, have the potential to significantly impact the retirement incomes of current as well as future UK pensioners. Any strategic thinking about the future of retirement income adequacy must therefore take this challenging public policy agenda into account.


4. Discussion: summarising the case for a new Pensions CommissionTaking a holistic, non-partisan view of pensions policy is likely to be a critical component in achieving successful policymaking. While taking the politics out of pensions will be a tough, if not impossible, task for future governments this should not prevent policymakers from making well-informed decisions on the basis of strong evidence and widespread consensus. That is, after all, the nature of good government, and an independent Pensions Commission could play a crucial role in this regard. The Commission would be ideally placed to monitor progress and consider new policy initiatives while taking into account the wider social and economic challenges facing the UK today. While there is clearly an opposing case for Government departments and their officials running such an exercise this would not give it the independence that is needed to build vital consensus across the various stakeholders whose buy-in will be critical to success. Consider, for example, the issue of raising the minimum contribution rates for people who have been auto-enrolled into a private sector pension scheme. This is by no means a trivial issue, as Pensions Minister Steve Webb said when giving oral evidence to the Work and Pensions Select Committee: “As you know, my personal view and my party view is that just jacking up the monetary contribution for everybody risks serious opt-out. If you just come in at 10%, 12%, 15%, I think there is a risk we lose a lot of what we have gained. I favour automatic escalation; so you start with the firm at, say, 8%, and then, unless you opt out, with each pay rise a proportion of the pay rise is added to that 8%, until it gets to whatever we think is a realistic level. I think we need that conversation sooner rather than later, and then you would have to consult, you would have to legislate—so it would be years before you could actually do it”.In response to the Minister’s points, it was noted by Committee Chair Dame Anne Begg that there is no one entity to have this conversation, “unless you set up some kind of independent pensions body”29. In our view, this body would be well placed to develop an evidence base about what the trade-offs might be – not just in terms of people opting out of saving altogether, but also for economic growth because it would involve people delaying their consumption of goods and services, as well as for employers because firms may need to raise their own contribution levels which would come at a cost. Without considering this issue as a multifaceted, multi-agent problem, the debate about whether and how contribution rates should rise would be dead and buried before it had even began. This is why the first Pensions Commission was seen as so successful – taking the necessary time and effort to build a detailed evidence base and develop widespread consensus on the appropriate direction of travel. An independent Commission, divorced from the trappings of government, is well placed to consider issues such as raising contribution rates from a systems-wide perspective – empowered to cut across the so called “pushmi-pullyu” culture in government whereby certain departments want to encourage people to save and others want people to spend more to raise tax revenues30. This is the central case for a new Pensions Commission to drive forward coherent policymaking in pensions, and it is one that is hard to ignore given the different world we are now in 10 years on since the Turner Commission.

29 Work and Pensions Committee (2015), “Oral evidence: Progress with automatic enrolment and pension reforms, HC 668” http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/work-and-pensions-committee/progress-with-automatic-enrol-ment-and-pension-reforms/oral/17374.html 30 See Johnson (2014), “The case for an independent Savings Commissioner”. Article for the Centre for Policy Studies: http://www.cps.org.uk/blog/q/date/2014/10/02/put-retirement-saving-above-politics/


5. The blueprint for a new Commission

Overall approachThe central purpose of any future Pensions Commission must be focused on the core goal of ensuring adequate retirement incomes for people in the UK based on the principle of consensus based policy making. This is consistent with the original thrust of the Turner Commission a decade ago. But it is also clear that the world has moved on considerably since Turner – sweeping legislative changes have been made in the world of pensions, while a financial crisis and subsequent economic turmoil at home and abroad has shifted the direction of public policy and made saving and investing for the future tougher than ever. Given this environment, a new Pensions Commission is urgently needed in order to look at the problem of retirement income adequacy in a holistic way – taking into account the political and economic realities of our time. Specific remit In order to achieve its central aim, the Commission should be given a remit to; 1) define target outcomes for retirement savings and extending working lives 2) develop a mechanism to regularly monitor progress against these targets and 3) consult and ultimately decide on whether new policy reforms are needed. In this way, the commission should seek to set out the rights and responsibilities of individuals, employers and government with respect to long term retirement income adequacy. At each stage of the process, the Commission must have regard to how the wider macroeconomic and political environment is likely to impact on the Commission’s aims and adjust its thinking and judgements accordingly. Consultation processTo deliver on its remit, the Commission must be able to build political consensus via broad consultation. Such consultation should not just relate to calling for written and oral evidence but also an active commitment from Commission members to visit and speak to key stakeholders in the debate including; political parties, consumer groups, employers, charities, the financial services sector, think tanks and more. This multifaceted consultation process should not just be a one-off, but must be an iterative process that is ingrained into each stage of the Commission – from evidence gathering to reporting its final recommendations. This way, by the time the Commission reports its findings, it already has buy-in from the stakeholders who could make or break the Commission’s proposals for further action. Who should lead and staff the Commission?To ensure that the Commission is independent, but able to build consensus across multiple fronts, the Commission should be led by four widely respected, but non-political experts representing academia, the charity sector, employees and industry. It should also have a small administrative, research and policy team to support its work drawn from different backgrounds and sectors. As with the first Pensions Commission, it must build a detailed evidence base using official datasets and report its analysis fully and transparently. Who should it report to?The Commission must carry sufficient weight politically to ensure that its findings and proposals are taken seriously by Government. For this reason, the Commission should be independent but must report to the Secretary of State for Work and Pensions, the Chancellor of the Exchequer and the Prime Minister. This should help to ensure that it is able to cut across competing departmental priorities. To facilitate a period of stability in pensions policy, no major new policies should be enacted until the Commission has reported its findings.


Over what timeframe should it report?“…my immediate successor, whoever he or she might be, ought to very early on in the next Parliament look across the landscape, see how all of the things are fitting together…identify early on, in consultation with people, where the big gaps are, and set out a five-year agenda, so that people know where you are going”. (Steve Webb, Pensions Minister)Given the scale of the recent reforms to pensions policy coupled with the economic and financial challenges facing households, there is a need to set up an independent Commission as soon as possible after the General Election to help navigate the tricky road ahead. But, in order to allow the current set of reforms to bed-in and to ensure at least short to medium term stability in pensions policy, the Commission should not set out any final proposals until 2017 at the earliest. As a result, we think that the Commission could replace the currently planned 2017 review of Auto-Enrolment. This should also give it the appropriate amount of time to consult widely and to develop a detailed evidence base from which it can make informed judgements about what additional policy measures might need to be taken.Should it have an ongoing commitment to review pensions policy?In our view, the Commission should not have a rolling commitment to review every few years but should be a one-off. We think a regular commitment to review pensions policy could actually undermine one of the main reasons for having a Commission in the first place – notably to ensure a period of stability and coherence in policymaking. Instead, the Commission should set the agenda for the next 10 years and specify how progress should be monitored over the medium to long term. Eventually such a monitoring role could be undertaken by the DWP, but only after the Commission has set the appropriately agreed targets and methods of measurement. Areas the Commission might want to consider:While it would be up to the Commission itself to decide what issues it ultimately focuses on, this report has highlighted a number of areas where such a body could provide substantial insight: Increasing savings levels• Monitor pension contribution levels and consider whether they should be raised over time.• Assess whether the existing focus on increasing DC pension pot holdings through AE is

sufficient or whether more radical policy measures (i.e. compulsion/tax incentives/expansion of ISAs) is necessary.

Helping people work longer• Monitor progress in extending working lives and consider whether there is a case for new

government policies to support longer working.• Feed into the review of SPA through evidenced based analysis about its effectiveness in

extending working lives and its distributional impact across social groups.Understanding how long term care and intergenerational differences will impact adequacy • Consider the growing prevalence of paying for long-term care as part of the overall challenge

of securing an adequate income in retirement. • Consider how retirement income adequacy might differ by generation and whether certain

age cohorts need more specific types of support than others.Have regard to the impact of macroeconomic forces on retirement income• Consider how the wider macroeconomic environment may effect retirement incomes in the

short, medium and long term.


• Re-evaluate assumptions about future investment returns and how these may effect retirement income.

Have regard to the public policy realities facing officials • With age-related government spending set to rise and the UK’s economic future uncertain,

the Commission can play an important role in assessing how pensions policy may affect the sustainability of government finances over the long-term.

• Understand, and, if possible, try to reconcile the trade-offs between policy which seeks to drive up savings and policy which seeks to stimulate economic growth.


Appendix: attendees at January roundtable

The following people attended the roundtable held on the 19th of January 2015 to discuss the need for a new Pensions Commission. We are extremely grateful for their comments which have helped to shape the report’s content. Nevertheless, the approach, contents and findings of the final report are solely the responsibility of the author.

Stuart Bayliss

Tom Boardman

Jim Boyd

Helen Creighton

Tim Fassam

Michael Johnson

Mervyn Kohler

Professor John Macnicol

Jackie Oatway

Andy Rear

David Sinclair

Amy Tarr

Ruby Thompson

Nigel Waterson

Richard Wilson

Ron Wheatcroft

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www.ilcuk.org.ukPublished in February 2015 © ILC-UK 2015

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