The UK pensions system has major shortcomings in its adequacy and sustainability, and could be improved by rowing back some of freedom and choice, according to research comparing retirement provision around the globe.
Britain placed 15th in the 2018 Melbourne Mercer Global Pension Index, with its overall score of 61.4 out of 100 only marginally improving to 62.5 as a result of increased auto-enrolment scores.
That put it ahead of some Western counterparts like the US and France, but behind less developed emerging market countries like Colombia.
The UK’s integrity was highlighted as particularly strong by the report, but a C grade for both adequacy and sustainability, indicating “a system that has some good features, but also has major risks and/or shortcomings that should be addressed”.
This screams to me that we need a default
Michael Johnson, Centre for Policy Studies
The report said the UK’s score could be improved by restoring the requirement to take some pension savings as an income stream, raising the minimum pension received by those on low incomes, and increasing coverage of employees and the self-employed under auto-enrolment.
Increasing the level of contributions to occupational schemes, raising saving rates while reducing household debts, and accelerating increases in the state pension age, could also boost the country’s standing among its pension peers.
Is freedom and choice good for UK?
The suggestion that returning to some level of compulsory annuitisation would improve pensions in the UK is a controversial one, with freedom and choice now embedded into the UK system.
“I simply don’t agree with them,” said Steve Webb, who oversaw the introduction of George Osborne’s policy as pensions minister. The director of policy at Royal London said the index prioritises annuitisation and dismisses “anything that allows people to do something instead of that, like pension freedoms and transfers”.
Brian Henderson, a partner at Mercer, stressed that due to its strict pensions viewpoint, “the index is going to favour systems that deliver a retirement income rather than necessarily lining up against the changing nature of what people do in retirement”.
“I don’t think we’re out and out saying ban freedom and choice,” he said.
Defaults could be happy compromise
Nonetheless, one of the architects of freedom and choice, Centre for Policy Studies research fellow Michael Johnson, has argued that the system in its current guise leaves disengaged savers in a vulnerable position.
“This screams to me that we need a default,” he said, reiterating calls for a system of auto-protection. Unlike abandoning the hugely popular freedom and choice policy, a default system “continues the offer of control to individuals if they want it”.
The Work and Pensions Committee recently called on the government to facilitate retirement defaults. So far, the Financial Conduct Authority has recommended investment pathways, while some master trusts are testing more comprehensive products.
Holistic approach needed to adequacy
The UK will also have to solve problems with undersaving for retirement. Henderson expected the 2019 increase in auto-enrolment minimum contributions, from 5 to 8 per cent of pensionable income, to improve the UK’s score in future, but conceded that the UK does not live up to many of its European peers’ examples.
However, he said any future increase in minimum contributions should be considered holistically, paying attention to the impact of pension savings on other forms of financial wellbeing.
“We just want to make sure that you’re getting the balance right,” he said. “Our view is to think of people from a broader wellness perspective.”
