ACA Chair, Steven Taylor, launching the ACA manifesto said: “The Association of Consulting Actuaries believes that helping today's working generations build adequate levels of pension saving is a defining challenge of our time. The DWP’s own research published last year suggests roughly 2 out of every 5 working age people are undersaving for retirement - equivalent to over 12.5 million individuals.”
“Auto Enrolment, whilst a success in terms of restoring and extending coverage will not provide the level of income most savers expect. The AE minimum will need to be either materially stepped up or combined with other measures including greater support for risk pooling arrangements such as CDC, and voluntary “sidecars” to deliver anything like a comfortable retirement for this and future generations.”
The ACA manifesto notes Defined Benefit (DB) schemes are now in a hugely improved position with very many schemes full funded on a low dependency basis and many in surplus on an insurance buy-out basis. Whilst these are largely unavailable beyond the public sector for today’s savers who are typically in less generous Defined Contribution (DC) schemes, the ACA believes that the UK’s DB schemes can continue to have a positive role in helping to address the long-term savings inadequacy challenge.
ACA key messages
• ACA says it supports recent DWP initiatives to encourage and facilitate greater use of current and future DB surplus funds to support employers and pension scheme members. Combining this with appropriate incentives and initiatives to support increased savings for today’s workers can create a virtuous circle whilst still protecting the pensions of previous generations of workers.
• The new DB funding regime needs to be fully finalised urgently and positively support the remaining open DB schemes and any new or hybrid arrangements that provide future benefits for today’s workers.
• ACA says utilising the experience and infrastructure of DB schemes to fast forward the development of Collective Defined Contribution (CDC) and other risk sharing pensions arrangements can help create a meaningful alternative to DC for today’s workers. Through collectivisation, CDC and similar schemes also have the potential to unlock a significant flow of future contributions directed to growth and productive assets that government is seeking. But we urgently need enabling legislation to avoid a lost decade.
• For very small DB schemes and a limited group of very poorly funded schemes that are already well-known to TPR, the introduction of the PPF as a public sector consolidator could be useful. Given the well-functioning commercial markets for end-game solutions that already exist, we believe the scope of any public sector consolidator should be strictly limited to those schemes that are unable to access a commercially available solution in the future.
Steven Taylor added: “We call for all parties to commit to timely completion of existing initiatives. There should also be stability in long-term pensions policy so that savers, employers and scheme managers have greater certainty in developing and implementing sensible long-term plans.”
The ACA manifesto calls for the following policy initiatives to be considered by each party:
Commit to completing current reforms where there has been a broad cross-party consensus, including Launching Pension Dashboards to savers and completing Value for Money initiatives that are practical to implement; Extending AE coverage as agreed by Parliament; Finalising the new DB funding regime, including the Regulator’s final Code and guidance that positively supports open DB schemes and run-on; and expanding coverage of CDC schemes, through the introduction of legislation for whole-life multi-employer schemes.
Steven Taylor added: “While each of these areas appears to enjoy cross party support, they have so far not translated into firm outcomes for savers and have instead been beset by continued delays and confusion of priorities. Each party should commit to completing this list of policy priorities. Otherwise, we risk a lost decade of negligible progress since the introduction of Automatic Enrolment.”
A fresh boost to auto-enrolment (AE), including increasing minimum AE contribution rates and further widening coverage: The ACA has long called for minimum AE contributions to increase in a planned phased approach to at least 12% over the next 10 years, with costs shared between employers and employees. AE also needs to be adapted to include the self-employed and those engaged in the ‘gig economy’.
Steven Taylor added: “According to DWP research, 12.5m people are undersaving for retirement. Without action, this means that almost half of the UK working age population are on course for financial disappointment in retirement or may end up working for far longer than they currently expect.”
Ahead of AE step-ups, introduce flexible “sidecar” savings to encourage a much-needed increase in voluntary savings above AE limits: Ahead of AE step ups, Government should introduce tax efficient Sidecar savings for levels above AE minimums that benefit from tax relief and are designed to be used for multiple savings needs. To mitigate cost of living constraints, savers should be given greater flexibility to access their own sidecar contributions for resilience needs, and which previous sidecar trials suggest would significantly increase overall levels of savings for younger generations.
Steven Taylor added: “Research by NEST during 2021 indicated that sidecar savings can be very effective for groups that have previously not had money put aside. We also agree with their anecdotal findings of a further positive link between voluntary savings and financial wellbeing and resilience.”
Introduce a default CDC provider for individual decumulation: Learning from the key principles underlying AE, we support the introduction of default decumulation pathways for DC savers. CDC pension arrangements have the potential to significantly improve retirement outcomes by harnessing the benefits of collectivisation for a new generation of savers. Compared to “drawdown”, CDC can materially manage an individual’s exposure to longevity risks – something that becomes ever more onerous over time as savings (and potentially the ability to manage finances) decline. We also believe in the establishment of a default CDC provider similar to how NEST currently operates for DC savers.
Steven Taylor added: “Industry estimates suggest that the ability to invest in growth assets for longer than in individual DC arrangements means CDC pensions could outperform traditional annuities for DC savers by perhaps up to 50%.”
Avoid knee-jerk changes to the pensions tax regime: We hope all political parties avoid knee-jerk changes to the present pension tax regime. Pension decisions are long-term and so stability is essential. The next government should seek to identify an overall framework which can flex to accommodate the needs of the day upon which the political parties might agree a consensus.
Steven Taylor added: “Any revised or updated tax regime should cater for all savers (DB, DC and CDC) and changes should not lead to any groups being discouraged from continuing in employment due to arcane rules”.
State Pension sustainability with replacement of the ‘triple lock’: The post pandemic period has also highlighted shortcomings in the triple lock uprating mechanism with periods of earnings growth and inflation out of alignment and so artificially uplifting the value of the State Pension. To address this, we suggest the ‘triple-lock’ should be retained only until 2026 while a full review of the appropriate level is carried out and, if necessary, revised upwards. From 2026, we recommend the State Pension is increased in line with earnings. We also suggest a 5-yearly review of the level of the State Pension which could reflect other factors such as general inflation over the period.
Steven Taylor added: “The annual debate over the triple lock distracts from the more important debate about the desired level of state pension. Government should review a new, potentially higher, base line for the State Pension and then apply a more balanced annual adjustment mechanism”.
A better social care regime: We believe that a longer-term approach requires a range of solutions to suit different age groups and we suggest a further review of the Dilnott findings so as to outline a comprehensive social care package that encompasses ideas including (i) some extra taxpayer funded spending; (ii) initiatives such as tax-free social care vouchers for those supporting older relatives in care; and (iii) consideration of a social insurance scheme that might help younger people better to plan ahead than the present older generations.
Steven Taylor added: “Government needs to demonstrate an integrated approach to savings, pensions and elderly care. Above all it needs to offer affordable ways that the State and individuals can address the costs of care with implementation, if necessary, in a phased plan over several years.”
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