While much of the groundwork for tackling the challenges in the pensions system has already been laid by successive governments over the last 20 years, LCP has identified five key themes that the government should focus attention on to deliver fairer and more sustainable financial futures.
• Inadequacy: Current savings levels are not sufficient to deliver an adequate retirement income for the majority of DC savers. The government needs to set out a clear roadmap for introducing the reforms in the 2017 Automatic Enrolment Review and increasing minimum contributions from 8% to 12%.
• Inequality: The DC pension saving system does not treat different types of saver equitably, with parents, ethnic minorities, and the less well-off groups often disadvantaged. It’s time to tackle these inequalities with targeted action to remove systemic barriers to DC pension saving.
• Irretrievability: Around one in four people have lost track of at least one their pensions and the problem of lost small pots is increasing exponentially. Working with industry, the government finally needs to deliver pensions dashboards and stop the proliferation of small pots by adopting LCP’s recommendation for ‘Magnetic Pensions’.
• Inefficiency: The quality of governance of DC pensions across the sector is mixed, with clear consequences for savers’ outcomes where it is not up to scratch. Labour should maintain the momentum behind the new VFM framework, finalising the required regulation as soon as possible, and consider going beyond it by integrating the principles of the FCA’s Consumer Duty.
• Insecurity: Savers have to make complex financial decisions in retirement that their experience of saving has not prepared them for. The pensions sector needs to do more to support them, in particular by requiring Master Trusts and providers to offer default retirement strategies that balance the typical needs of members in retirement and enhancing the pensions guidance the Money and Pensions Service is able to offer to make it more relevant to members’ circumstances.
Commenting on the key themes for DC pensions, George Currie, Senior Consultant at LCP, said: “A new government gives us the opportunity to renew efforts to tackle long-standing challenges in the DC pensions sector. Given Labour’s manifesto commitment to a full-scale review of the pensions landscape, it should use this opportunity as a ‘Beveridge moment’ to tackle the ‘five great evils’ holding back DC pension savers, namely: inadequacy, inequality, irretrievability, inefficiency, and insecurity. These are the themes that should be at the centre of any review, as the solutions to these issues will form the basis of a sustainable, equitable DC pensions system for all.”
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