A pensions policy that is bad for pensioners?

3 Aug 15

Last year’s Freedom and Choice reforms tore up the consensus that pensions policy needs to smooth income over retirement. However, research suggests that individuals still value pension predictability.

Why do we have a private pensions policy in the UK? What is government trying to achieve? What does ‘good’ look like?

The consensus that lasted from the Finance Act of 1921 up to and beyond the ‘Turner Commission’ on pensions was that pensions policy sought to help individuals smooth their income over their lives and ensure they did not run out of money in old age. 

Budget 2014 scrapped this approach. Henceforth, the job of pensions policy is apparently to ensure individuals have a pot of savings at the point of retirement. It is then up to them what they do with it, and the government should be entirely neutral.

The dominance of such thinking is all the more remarkable given the glaring contradiction now at the heart of UK pensions policy: up to the point of retirement, employees apparently need to be nudged into doing the right thing (saving) through ‘auto-enrolment’ into a workplace scheme; yet, at retirement, individuals are assumed to be fully capable of achieving optimal outcomes in the context of extremely complex choices.

However, what recent debate has routinely ignored is the most important question of all: will the April 2015 Freedom and Choice changes lead older people to have better or worse retirements?

We know from international experience of ‘voluntary annuitisation’ systems that ultimately very few individuals opt for a secure income over cash. If this eventually becomes the norm in the UK – and there is no logical reason to think it won’t – what will be the consequences for people’s retirements?

To answer this question, the Strategic Society Centre recently undertook statistical analysis of retirees with a private pension income in the ‘English Longitudinal Study of Ageing’ to explore the associations between level of secure income, level of non-housing wealth and wellbeing.

Regardless of the level of someone’s financial wealth, we found that level of guaranteed income is significantly associated with various aspects of wellbeing and leisure. These include going to the cinema, reading a daily newspaper, taking a holiday, participation in community groups and other civic activities. Income is also associated with how people feel about their life, and whether they report “the conditions of my life are excellent” and “I have got the important things I want in life”.

The research suggests that an average DC pension saver would be likely to have a better retirement if they seek to maximise their level of guaranteed income.

The findings also suggest that if private pension incomes do decline following Freedom and Choice changes, this will likely lead to a reduction in levels of wellbeing among the older population – a catastrophic failure of government policy.

So although rules forcing individuals to annuitise their DC pension savings are likely gone forever, our research suggests nudging individuals into maximising their guaranteed pension income should be the aim of UK pension policy.

A copy of Income, Security and Wellbeing can be downloaded here.

Did you enjoy this article?