UK avoids Australia’s Covid-19 pensions trap

I was contemplating this question as life was beginning to feel like it was returning to normal with pubs, restaurants and workplaces beginning to open up again.

However, while some restrictions had relaxed, providing a reminder of what life was like before the Covid-19 ‘new normal’, beneath the surface the crisis was inflicting severe damage to the pension hopes of millions.

The UK government was wise not to go down the road of other countries and use the nation’s pension pots as a Covid-19 relief fund

The outbreak and associated lockdowns are impacting retirement savings, schemes, providers, regulators and individuals, all potentially leading to lower income in later life. 

Millions of individuals now face working longer, or living less comfortably in retirement than previously hoped, due to pandemic-related job losses or because they are saving less, if at all.

UK response mixed

Against this backdrop, which is largely playing out in the shadows of the wider economic crisis, the UK government has had some marked successes in supporting retirement saving in Covid-19 times.

A good, quick response was its decision to subsidise the wages of nearly 10m workers through the furlough job retention scheme.

Significantly, under this scheme the government covered some of the minimum automatic enrolment pension contributions for employees. This ensured pension saving for millions of workers carried on.

Second, the Pensions Regulator gave hard-hit employers breathing space to pause, or reduce, their defined benefit pension contributions for up to three months.  

This was a sensible intervention, given many employers were being pushed to the brink by a lockdown-related cash crunch.

It is far better to have a viable employer supporting the pension scheme, than workers facing cuts in their retirement income if they land in the pensions lifeboat fund because their employer has folded.

Finally, the UK government was wise not to go down the road of other countries and use the nation’s pension pots as a Covid-19 relief fund.

Other countries, such as Australia and Chile, have allowed early access to pension pots for those hard hit by the crisis, and have subsequently seen steep runs on their pension systems.

In Australia, around A$28bn (£15.3bn) was pulled from superannuation pots by more than 2m people over a three-month period, with not all released cash reportedly used to put food on the table, but for other non essential spending, such as ‘boob jobs’ and upgrading cars.

Concerns are now being raised in Australia and Chile about the long-term impact this emergency easement of rules will have on the younger generation, still struggling to get back into work.

Scams threat still concerning

What about where the UK could be doing better? One area of immediate concern is scams.

According to Action Fraud, the UK’s national reporting centre for fraud and cyber crime, cases of reported pension fraud have almost tripled since the pandemic as opportunists targeted the vulnerable, with new online tactics and scams.

The work and pensions committee is quite rightly now focusing on what more the government and industry can do to tackle the rising scourge of pension scams, with an inquiry planned for September.

But there is also the concern about inappropriate behaviour by employers.

Pensions Ombudsman Anthony Arter has raised concerns that more company bosses will attempt to save costs by coaxing staff to quit their pension plans. Furthermore, Mr Arter has also seen rising cases of employers holding back pension contributions, and not paying them to the pension company.

Failing to pay pension contributions to a pension company, or inducing staff to opt out of auto-enrolment, is against the law, and the regulator must act where it finds employers are flouting these duties.

Older workers high and dry

Finally, the government must give thought to how it will support those in their late fifties and sixties, who survived Covid-19 but may be unable to work due to the long-term impact of the illness, or because job opportunities have shrunk.

The pandemic will change the nature of work, with people in these age groups disproportionately affected. The government may do well to consider early access to the state pension for those worst affected.

At the time of writing, hopes of getting through the summer with further easing of restrictions are beginning to fade, as fears of a second wave of the virus start to rise.

This does not augur well for long-term saving, particularly as the furlough scheme is unwound.

It is very possible that over the coming months more may move away from pension saving as job losses rise and the economic impact of the pandemic starts to hit on a wider scale. 

The government must resist the temptation to go down the route of other countries and allow early access to pension pots, to help those through hard times.  

Supporting employers and savers through job retention, and creation, must remain a key priority.

Josephine Cumbo is pensions correspondent for the Financial Times