Securing tomorrow

For weeks, Labour has been without a shadow pensions minister. The duration of this vacancy, so close to an election, is proof that the party does not expect pensions to be a political battleground this year. The party has committed to retaining the triple lock, and beyond that has little reason to think that pensions will be a doorstep issue.

But low political salience does not mean there is not a bulging pensions in-tray and vital choices to be made in the new parliament. Rachel Reeves acknowledged this in November last year by promising a comprehensive review of the pensions system. It must be a short review that leads to rapid action. The long-term nature of pensions policy is no excuse for the glacial progress we have seen from the current government in recent years.

We summarised the key issues that should be addressed by this review in a pithy chapter in our Plans for Power pamphlet last autumn. Reforms are needed to increase pension contributions, extend workplace pensions to more people, achieve secure retirement incomes, and ensure pension funds play their part in growing Britain’s economy.

The good news for Labour is that reform on all these fronts is possible without new public spending. The party will have the opportunity to push through significant change at a time when progress on many other domestic policy issues will be constrained by cash.

Of these objectives, Reeves’ first priority will likely be the contribution pension schemes can make to British growth, building on from Jeremy Hunt’s Mansion House agenda. She has proposed a new fund where defined contribution funds would work with the government-backed British Business Bank to invest in high growth businesses. And she has joined the government in wanting to consolidate small pension funds to reduce costs and diversify investments.

But Labour’s review could go much further in shaping the pensions landscape and the way funds are invested. The endpoint for workplace defined contribution schemes might be a small number of very large funds, on the Australian model, making strategic investments in British business as well as tracking global markets. Meanwhile, mature defined benefit pensions need the right scale, regulation and investment vehicles to be sources of low-risk patient capital for infrastructure and housing.

The review also needs to look at pensions from the perspective of savers and retirees. In the parliament ahead Labour should seek to complete the automatic enrolment revolution it started when last in power. We set out the key planks of reform in our 2022 report Good Pensions For All. There is broad support for increasing minimum pension contributions towards 12 per cent of total earnings (in our view, this should be paid for by employers rather than workers). We also called for a new opt-out system for the self-employed, based on digital tax reporting and cash incentives, and pension contributions for people who’ve stopped work to care.

Labour’s pension review should ask how government policy can support and nudge more employers to go beyond the minimum

Most pensions insiders also accept that George Osborne’s ‘pension freedoms’ went too far. We need new defaults and guidance that result in almost everyone converting their pension saving into a secure income that will last throughout their retirement. To achieve this, the Fabian Society has called for automatic consolidation of pension funds in the run-up to retirement and compulsory guidance or advice before anyone opts out of a product that includes a lifetime income. But getting this right will be hard when over 1 million people are in poverty between the age of 60 and 64, as we revealed in our March report When I’m 64. We need a flexible system that enables people to balance their financial needs in their 60s and their 90s.

Defaults and regulation are hugely important in pensions. But new ministers must not focus only on minimum standards. Labour’s pension review should ask how government policy can support and nudge more employers to go beyond the minimum, something that has been ignored in recent years.

This is particularly true of big businesses and sectors largely funded by the public sector. Our proposals for a National Care Service include a call for collective bargaining on a sector-wide pension scheme for adult social care. We also think the government should be pushing big employers towards higher contributions and better pension schemes. This could include asking large businesses or whole sectors to shift towards collective pensions like the new Royal Mail scheme, where risks and rewards are pooled between members.

Finally, Labour’s pension review needs to ask how to prevent future pensioner poverty. Since the mid-2010s there has been an alarming rise in poverty among people over state pension age, despite the triple lock and new state pension. The problem could easily grow worse in the decade ahead, with many future retirees now renting or with scant pension saving.

Adair Turner’s wildly successful pensions review of the early-2000s started by asking about poverty. The next review of pensions should do the same, looking across both the public and private pension systems. In June, the Fabians kick-off new research on solutions to pensioner poverty, supported by the Pensions and Lifetime Savings Association. We hope to provide some of the answers.

Image credit: mali desha via Unsplash

Image credit (pinned, News and Insight): Isaac Quesada via Unsplash