Pensions Minister Steve Webb has spoken exclusively to Saga about the poor image of pensions, how low interest rates and quantitative easing have damaged annuities and why Government is going to use employers to promote pensions and auto-enrolment.
He also sees merit in Andrew Dilnot's suggestions on care funding.
"Pensions have an image problem" said Steve Webb as he described auto enrolment, the Government's next great pensions' scheme, as being like a Ming vase; "very precious, but very fragile". The Minister wants to change perceptions and instil confidence in retirement planning ensuring that charges are not too high and that pensions offer value for money.
Radical state pension reform is his goal
"We need to move from a system that's fiendishly complicated, that still leaves millions of pensioners living in poverty, to one, ideally, where we have a single, simple, decent state pension on which people can build." He stresses, however, that his state pension reforms will not be in place before auto-enrolment starts, although his proposals for a flat-rate basic state pension should have been published before then.
Ultimately, Mr Webb wants to get the basic state pension right and also to get "millions more people in to pensions saving" via the process of ‘auto-enrolment' which begins next year.
Government to rely on employers to promote auto enrolment
Mr Webb says it will be the employer's role to ensure auto enrolment is successfully rolled out: "The employer will choose the scheme ... they need to know what's going on ... communications is crucial". Saga is concerned that many employers, especially smaller ones, may not be receptive to taking on this responsibility.
The Minister explained that his department and The Pensions Regulator would provide employers with the best tools possible, for example, the DWP will provide employers with "market tested specimen literature that communicates pensions in plain language and explains what auto enrolment is" and plans to spend £10 million on communications to make the scheme a success. The Pensions Advisory Service will also be expected to play an increasing role in communicating about pensions.
Minister changes his tune on flexibility in pension savings
Dr Altmann questioned the Minister on his change of heart on early access to pensions since being in Government. Mr Webb was previously in favour of unlocking pensions early but following a recent consultation, he said there was a noticeable lack of support for this and he was worried that people "would blow their pension pot". He said accessing pension pots early would "fundamentally change the nature of the product" and that "now isn't the right time" with auto-enrolment starting next year.
However, the Government will track people as they auto enrol and if the evidence is that the reason people opt out is that they don't want to tie their money up, then he would consider increased flexibility again in future.
‘QE has damaged pensions'
When asked about concerns over annuity risk given low interest rates and quantitative easing, the Minister admitted to "an issue about volatility, not knowing what you are going to get [and an issue] about poor returns." He hinted to an announcement "very shortly" regarding an improvement to the way annuities work which will look at whether shopping around could essentially be the default option.
Previous Government's policies damaged the UK pensions system
The Minister named the 1997 removal of ACT relief as having badly damaged occupational pensions and said that stakeholder pensions were a failure, with most of them being just "empty shells." But he also said that the "fundamental flaw which impacted pensions [was] the mismanagement of the economy."
Care provision will require an insurance solution
Mr Webb says funding long-term care in light of the catastrophic costs that Andrew Dilnot talks about with only some people facing risk of very high costs "needs an insurance solution" - either social insurance or private insurance. Webb believes if the Government can deal with the 'tail risk' as Dilnot has suggested, then perhaps insurance, disability-linked annuities and pension reforms to provide for care would be possible.
On speaking about her interview with the Minister, Dr Ros Altmann said: I am delighted the Minister took the time to speak to Saga about his plans for Pensions and for older people in this country. He said the key to helping people over 50, as they look to retirement and future care, will come down to "dignity" and "choice". We certainly hope this Government can deliver on their promises to improve the lives of pensioners and older people. Saga will be watching!"
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