Pensions - Articles - Pensions Build Back Better report from ACA

 Launching the report, ACA Chair Patrick Bloomfield said: “We believe that as the Government builds its medium-term policy response to the pandemic it is essential that proposals form part of a wider intergenerational strategy covering all aspects of tax and savings, including pensions and social care, and that this will help to protect the needs of society for generations to come.

 “Our latest survey found there’s strong business support for the policies set to become law through the Pension Schemes Act in 2021. Pensions are becoming central to tackling climate risk, with savers demanding action and schemes beginning to grasp the nettle. DB schemes getting access to commercial consolidators and a funding regime focussed more towards the long-term are both strongly supported. And there’s support for Collective Defined Contribution as a new way of saving beyond just Royal Mail.

 “Reading our survey results gave me a sense of optimism. British business has a clear collective view on the issues our society faces. It also has the appetite to use pensions to make society fairer and tackle climate risk. This calls for far-sighted policies, as part of any plan to ‘build back better’”.

 The ‘Six key areas’ where the ACA report says further policy reforms are needed are:

 1. A refresh of auto-enrolment (AE), including widening coverage and increasing minimum AE contribution rates during the Parliament. 

 Key survey finding:

 • 88% of employers support over 18s being eligible for AE and 84% support AE applying from first £1 of earnings.

 Steven Taylor, who Chairs the ACA’s Pensions and Savings Adequacy Group, commented: “The present 8% of qualifying earnings (which equates to closer to 4% of total earnings for those on lower incomes) is inadequate to provide for a sufficient income in later life. Our survey found that overall median contributions to DC Schemes are around 10%, but this is still significantly lower than the c.30% median contribution to DB schemes, which is likely indicative of the “real cost” of providing for a comfortable retirement.

 “To begin to bridge these gaps, we suggest minimum AE contributions should increase to 12% of total earnings by the end of the Parliament with costs shared between employers and employees. We suggest an annual opt down option to half this level to reflect the economic hardships brought about by the pandemic. The earnings threshold (which currently stops millions being signed up for AE) should be reduced or removed and AE should be adapted to include the growing number of self-employed and those engaged in the ‘gig economy’. It is encouraging the Pensions Minister seems keen to head in this direction if room can be found for another Pensions Bill this side of 2024.” (For more, see Report pages 7 and 13-16)

 2. There is an urgent need now for increased flexibility in the way people save for retirement, for example by extending pension freedoms to younger savers (subject to appropriate safeguards and incentives) to promote both resilience and intergenerational fairness.

 Key survey finding:

 • 62% of employers think more flexibility would increase employee saving.

 Steven Taylor, who Chairs the ACA’s Pensions and Savings Adequacy Group, commented: “To provide greater incentives for higher levels of pension savings by younger employees, and support the wider AE measures we have suggested, the Government should relax current rules and implement an extension of pension freedoms allowing early access of up to a maximum of £30,000 (or 50%, if lower) of individuals’ pension funds that are currently available only from age 55. This amount is consistent with the “trivial commutation” limit often applied to the return of “small” pension funds to older savers. These funds could be used to meet a short and specific list of eventualities, such as following job loss in future pandemic scenarios, or potentially to help fund house deposits.” (For more, see Report pages 7 and 26).

 3. Action is needed on the overdue intergenerational commitment to a better social care regime.

 Key survey finding:

 60% support tax changes to encourage social care costs to be met from private pensions.

 Steven Taylor, who Chairs the ACA’s Pensions and Savings Adequacy Group, commented: “The Government needs to ‘be brave’ and make proposals this year on what it feels the appropriate burden of cost for providing social care, split between the taxpayer and the individual, should be. It needs to propose what constitutes a “baseline level” of social care and how this will be reviewed as the years go by. If the taxpayer is to contribute more (which seems inevitable), then it needs to spell out the impact on rates of tax and how this extra burden might be spread as fairly as possible across the generations.

 “We believe that a fair longer-term approach will require a range of practical and financial solutions to suit different age groups. This could include ideas such as consideration of tax reforms whereby pension income used to pay for care is tax-free, purchase of care insurance products is incentivised and/or a social insurance scheme is put in place that might help younger people better to plan ahead than the present older generations have been able.” (For more, see Report pages 8 and 17-18)

 4. There is an urgent need now for significant simplification of the pension tax regime, with clear policy goals and extensive consultations to minimise unintended consequences.

 Key survey finding:

 79% of employers say the complex pensions tax regime is negatively impacting their business and 89% say it needs simplifying even if that means some people are worse off.

 Karen Goldschmidt, Chair of the ACA Pensions Taxation Committee, commented: “The Government needs to think carefully on how any further pension tax reforms should be progressed, given the considerable sums involved and the resulting personal financial implications for public and private sector employees (in both DB and DC schemes) of making any changes.

 “We strongly urge that any measures are for the long term, properly thought through, involving widespread consultations, so that best endeavours are made to smooth out the problems which have resulted from numerous tweaks made in the regime in recent years. We accept that there are challenges especially if the policy is that changes are overall to be fiscally neutral (or revenue raising), noting that only part of the published “cost of relief” relates to future accrual.” (For more, see Report pages 8 and 24)

 5. Balancing costs between current workers’ and previous workers’ pensions.

 Key survey finding:

 81% of employers say DB costs create intergenerational unfairness between current and former employees and 74% between different cohorts of employees.

 Peter Williams, Chair of the ACA Pension Schemes Committee, commented: “We encourage TPR to deliver a new DB funding code that has room to evolve as circumstances require. Actuaries acknowledge that DB scheme funding should gradually improve as schemes mature. Meeting this cost too quickly will lead to systemic risks today. Meeting this cost too slowly will lead to systemic risks tomorrow. Maintaining balance has to be our collective goal.” (For more, see Report pages 9 and 19-20)

 6. Tackling climate risk, through the way savings are invested.

 Key survey finding:

 52% of schemes report greater interest from members in investments in socially responsible, environmental and climate areas.

 Stewart Hastie, who Chairs the ACA Climate Risk Group, commented: “Climate risk is an existential threat to us all. Our survey found members are waking up to this, but schemes are hesitant in reacting to climate change investment risks and opportunities.

 With the Government keen to see its TCFD Regulations in place ahead of COP21 in November, ACA and consulting actuaries are committed to guiding schemes to take positive actions in this important area.” (For more, see Report pages 9 and 21)

 Pensions - Build Back Better Report