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IPE special report May 2018

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UK accused of schizophrenia over risk-sharing pensions policy

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The UK government is pursuing a schizophrenic pensions policy and is unpicking the consensus between social partners that allowed for the introduction of auto-enrolment, a senior opposition politician has warned.

In her first major pension policy speech since taking on the brief, shadow work and pensions secretary Rachel Reeves said the government should consider issuing longevity bonds to assist retirees and that the potential launch of collective defined contribution (CDC) schemes required stricter governance rules.

She also warned that the government was unpicking the consensus around auto-enrolment by increasing the earnings threshold, and said it should be lowered by around £4,000 (€4,925) to allow for low-income workers to be automatically enrolled.

Reeves, who has also shadowed pensions minister Steve Webb since becoming an MP in 2010, accused the government of not knowing where its pension policy was heading.

“There seems to be [some] schizophrenia in the government,” she said, referencing recent relaxation of drawdown rules announced in this year’s Budget.

“On one hand, it is pulling in the direction of more individualised schemes – it’s your pot of money and when you’re 55 you can do whatever you like with it,” she said.

“On the other hand, this [question of] should we have a collective DC scheme, which, if it is going to work properly, we can’t have everyone taking their money out at 55 and not sharing that risk.”

Michael Johnson of the Conservative-leaning Centre for Policy Studies also saw the tension between the Budget policy changes and the Department for Work & Pensions’ stated desire to reintroduce risk sharing – either through a new model of defined ambition (DA) pension, or the introduction of a framework for a collective DC system – as an opportunity for the opposition.

“There is a great opportunity for the Labour Party to focus on what it is for our national identity – are we a nation of sharers, or are we a nation of individuals.”

Reeves said it needed to be made clear that CDC schemes would expose members to a new set of risks and required “robust” governance mechanisms.

“So opening the way to collective DC schemes makes it all the more important that the government take up our call to impose a legal requirement on all pension scheme providers to prioritise the interests of savers above those of shareholders – policed, where possible, by independent trustees.”

The MP later added that trustees in CDC schemes would need to ensure the interests of all members, and not only those of pensioners, were protected to avoid active members subsidising the prior generation’s retirement. 

Reeves also announced that David Blake of the Cass Business School-based Pensions Institute had agreed to chair a policy taskforce for her party.

The group, which would also include a representative from the employer lobby group CBI, would examine the role of the National Employment Savings Trust in allowing savers “to access good-quality retirement products” and help savers manage longevity risk.

Reeves said the government could start issuing longevity bonds, a measure backed a decade ago by then-Bank of England governor Mervyn King to assist the annuity market.

The OECD has in the past also urged governments worldwide to “kick-start” a longevity bond market to assist pension funds with their longevity risk.

Readers' comments (1)

  • There is a need for pensions policy discussions that centre on the bigger picture of which of these two principles leads to pensions which are cheaper for society as a whole. Most of the discussion has followed the line that DB pensions are expensive because the employers don't like bearing the risk. But all the evidence is that individualistic DC pensions are far more expensive because they reject risk sharing. If a pension is a secure income for life then we know from many studies that the cheapest way of doing that is by schemes based on the sharing of investment risk, sharing of longevity risk through annuitisation and pooled investment charges. The Labour Party should be saying that DB schemes are socially beneficial because they are based on collective principles and DC schemes for many people unaffordable because they are based on neoliberal individualism.

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