Reform is underway to encourage people to work for longer and to save into a pension. However, contributing at the rates required by auto-enrolment across a full working life will give the current generation of employees a less than 50:50 chance of a decent income in retirement. New pension products and strategies are urgently needed to protect future living standards.
This report uses original qualitative research to explore the key barriers that are preventing people from engaging with pensions, and the underlying principles that they want from a pensions system, before assessing whether defined-ambition pension models could address these challenges and priorities.
It finds that public investment in pensions is being held back not by affordability alone, but by distrust of the institutions involved (including concerns that the government will ‘move the goalposts’), a general lack of understanding about pensions, and the related fear of making the wrong decision. This demonstrates that better communication strategies, stronger governance structures, and long-term, cross-party commitments to policy are all essential components to successful reform.
Based on public attitudes, this report provides three core recommendations that policymakers and the industry should incorporate into the defined-ambition agenda:
- Ask members to set a target pension income.
- Offer protection against volatility by making a smoothed pension a lead option for auto-enrolment.
- Introduce a ‘collective defined contribution’ pension to the UK.
While debate is ongoing, leading academics and government-commissioned modelling suggest that CDC could offer a better pension salary for members than DC pensions, because:
- Fees can be substantially lower in CDC than in DC vehicles. The Dutch average AMC is just 0.15 per cent, which throws the UK’s current consultation about capping fees at 0.75 or 1 per cent into sharp relief. Just bringing down AMC’s, by creating larger schemes which could reap economies of scale, would substantially boost pension pot size.
- Risks are shared, so investments can be more productive. There is less need for ‘de-risking’ – moving invested assets into low-risk, low-yield options – in the run-up to retirement.
- Self-annuitisation (as in the Dutch model) could reduce the fees associated with annuities through economies of scale, and allow funds to remain invested throughout retirement. Sharing longevity risks should mean that savers get better rates than they would do on an individual basis.
Chosen excerpts by Job Market Monitor. Read the whole story at Defining ambitions: Shaping pension reform around public attitudes > Publication :: IPPR.
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