Pensions at work, that work

Typically on the left when we think of pensions, we think of the state old-age pension. Labour has a proud record in defending and enhancing the state pension to prevent poverty in old age. The last Labour government focused on the poorest pensioners, adding pension credit to the basic state pension to ensure that for the first time in history, pensioners were not the age group most likely to be in poverty. This was a historic Labour achievement.

Less well known was Labour’s revolution in workplace pension saving. But this legacy will be of crucial importance to the next Labour government: nowhere does Ed Miliband’s call for ‘responsible capitalism’, where a fairer, more productive economy reduces the public cost of failing markets, resonate more strongly than in the world of workplace pensions. Pension saving should deliver two things. First, a reasonable income in retirement for savers on a cost-effective basis. Second, savings should be invested in a way that develops the long-term capacity of the productive economy. The current British workplace pension system is flawed in both respects.

The next Labour government will inherit an economic mess of George Osborne’s making. Money will be tight; living standards squeezed. Every penny will count. The coalition is intent on a simpler but, for many, less generous state pension. The government assumes that the new workplace occupational pensions for all – ‘auto-enrolment’ – introduced by Labour will take up the slack. But the market in private pensions does not always deliver value for money. This is due to three main problems. First, the costs of pensions are hidden and can be high, allowing financial intermediaries to absorb the savings that should be creating retirement incomes. Second, there is a conflict of interest in contract-based pension schemes between delivering for savers and meeting shareholders’ interests. Third, many pension schemes operate at an inadequate scale, generating extra costs and unable to support trustees who could act in the savers’ interest.

It does not have to be this way. The workplace occupational pensions in which most Britons will save in the future can be reformed to deliver value for money. This would help the ’squeezed middle’ – both directly and indirectly. Directly, because there are a set of reforms which would lower the costs of saving into a pension, ensuring people a higher income in retirement. Indirectly, because these same reforms would also lead pension providers to favour long-term, patient approaches to investment rather than a short-term casino one. As numerous commentators have observed, one of the keys to generating and sustaining higher growth in the UK is the fostering of a long-term approach amongst British businesses.

Ed Miliband has emphasised the importance of reforming markets to end consumer rip-offs. To do this, in a new Fabian pamphlet, we argue that all pension providers must acquire scale, reform their governance and lower costs to savers. This will personally benefit savers in terms of lower charges but the consequences are much broader for the economy. Michael Heseltine’s report for the government on industrial policy emphasised that for a growth strategy to succeed, all departments – not just the ‘economic’ ones – need to act to stimulate growth. In this context, he specifically noted that UK pension funds are generally too small to cope with providing investment for infrastructure projects. Indeed pensions in the UK are a cottage industry in need of the efficiency and expertise that scaling up has produced in other countries.

Pension credit represents a huge redistribution of resources to the poorest pensioners in our country, while the stakeholder pensions Labour introduced began the necessary reform of workplace pensions. But auto-enrolment, legislated for by the last Labour government, is potentially the most radical reform of all. The 10 million employees in the UK not saving into a workplace pension are being enrolled automatically by their employer. This cardinal fact changes the politics of pensions. An industry capable of serving these millions of new low and middle income pension savers becomes a political imperative.