'We need consensus on what the pensions industry is actually trying to do'

The swift granting of royal assent following the bill’s passing in the House of Lords last week means that the Department for Work and Pensions will soon be able to set the wheels in motion to implement these changes.

In the case of making pension savings count from the first pound earned – a move which will significantly increase the proportion of earnings saved, particularly for those with lower earnings – timing is everything.

It’s crucial that this happens at a time when earnings are rising faster than inflation so that people do not face a choice between stopping saving and being able to afford to live, as they do now. It’s important that this is phased in slowly and carefully.

One of the reasons for AE’s success is that, historically, opt out rates are far lower than had been planned for and policymakers will be well aware of the risks of doing anything that might prompt a significant number of workers from deciding they can no longer afford to make contributions.

The DWP’s moves on AE are welcome and sensible, but they should be the start of a broader conversation about pensions adequacy.

Savings rates have held up pretty well through both Covid and the cost of living crisis, but careful stewardship of the policy remains a priority.

The DWP’s focus should not only be on these changes to AE, but on a much bigger picture.

We think that both the confused debate over the future of the triple lock and recent government research showing that 38 per cent of people are not saving enough for retirement make it clear that a more fundamental review of UK pensions adequacy is required.

For us, the next step on is developing consensus about what the pensions system is trying to do. At first glance that sounds silly, it’s obviously there to replace income once people are no longer in work. But how much income?

And given that we have two main pillars of entitlement – the state pension and workplace pension saving – what should we be looking for from each pillar?

We see a flat rate state pension as the cornerstone of retirement saving in the UK. Flat rating the state pension avoids the traps created by means testing. Traps that the pre-Turner Commission UK was walking into at a worrying pace.

Unlike other countries like the US, the UK has never managed to sustain an earnings-related state pension. As the recent debate over the triple lock has shown, we’re unusually vulnerable to concerns about cost driving the debate over the adequacy of the state pension.

That tends to lead to calls for greater reliance on means testing to prevent poverty in retirement and control the cost of the state pension.

Those calls are well intentioned, but over time means testing bends the pensions framework out of shape.

If we swing back towards greater reliance on means testing in retirement to better target resources on the supposedly more deserving, then it creates incentives not to save. Why save for retirement if doing so just erodes your future means-tested benefits?

Setting an overall adequacy objective for the UK pensions system, spelling out what the combination of the state pension and statutory minimum contributions will achieve, will help resolve both issues.

With an overall objective in place saying that people should be able to achieve a given percentage of pre-retirement earnings from the combination of state and workplace pensions, it will be possible to debate what the right balance is between state pension entitlement and workplace pension saving in a more sophisticated way.

The more we intend to rely on the state pension, the more important generous uprating becomes and the less emphasis we need to place on workplace saving.

Setting an overall adequacy objective for the UK pensions system will help resolve both issues.

And vice versa, desire to control spending on the state pension would create pressure for increasing statutory minimum pension contributions.

Providing a framework will not solve the debate over the relative importance of private saving and state entitlement, but it will highlight the importance of both a coherent system and a stable consensus on what we are trying to do.

For this reason we think the DWP’s moves on AE are welcome and sensible, but they should be the start of a broader conversation about pensions adequacy.

The next step should be to add structure and a framework to the debate that helps make it clearer what the objectives of the pensions system are.

People deserve to know what sort of lifestyle they can expect in retirement from the two main pillars of our pension system – the state pension and AE. Without this we will struggle to maintain the progress we have made over the past decade.

Phil Brown is director of policy at People’s Partnership