Following the recent announcement of a new Pensions Commission that will “make recommendations to the government on the broader questions of adequacy, fairness, and sustainability” in a similar fashion to the 2002 Pension Commission that was chaired by Aidar Turner.
The 2002 Pension Commission, set up in December 2002, produced an interim report in October 2004, setting out a detailed and comprehensive analysis of the UK pensions system. Their Second Report, published on 30 November 2005, presented its conclusions on the likely evolution of the UK pension system if policy remained unchanged, and the Commission's recommendations for a new policy direction. A final statement was published on 4 April 2006, detailing its response to specific issues which had arisen in the debate on pension reform since publication of the Second Report.
The original Commission's reports are often collectively referred to as the Turner Report.
The Turner Report led to the introduction of auto-enrolment that required all employees (subject to various caveats) to be auto-enrolled into a defined contribution scheme with a minimum contribution rate of 8% of salary (as defined by the legislation, which incorporates a minimum salary and a cap on relevant earnings). The company element of the contribution of 3% of relevant salary was phased in over three tax-years (1%, 2% and then 3%).
The focus of the new Pensions Commission, which will be undertaken by Baroness Jeannie Drake, Sir Ian Cheshire and Professor Nick Pearce, will be, as put by the Government itself, to “finish the job by mapping out a path to a pensions system that is truly adequate”.
Reviewing the details put out by the Government it is clear that a major focus will be on adequacy and attempting to rectify the issue that, if nothing changes, then many people will have a retirement income lower than they might expect and / or would like. The Turner Report assumed that the 8% minimum would be a minimum with many employers paying more and many employees choosing to “top up” their savings with voluntary contributions. For the majority, this has not happened. With the Pension Schemes Bill being introduced to address a number of issues around value for money from the savings actually made it seems that the level of contributions going forward will be the key factor for the new Pensions Commission.
The Government has, within the Pension Schemes Bill discussions, frequently mentioned Australia and their system of “superfunds” (which are large defined contribution schemes, entirely different to the UK concept of a superfund) as being a relevant comparator. It is worth nothing that an Australian “super” has a minimum contribution requirement of 12% of ordinary earnings –50% more than the UK’s minimum contribution of 8%, with no earning threshold, no cap (albeit there is a $30,000 cap on contributions), and paid for entirely by the employer.
Given that auto-enrolment has historically shared the cost of pensions between the employee and the employer it is probable that in the longer-term both costs for employers and deductions from employee pay packets will rise.
Fortunately for employers, the Government has already intimated that any changes (or should we say increases) to contributions under the auto-enrolment regime will not take place until after the next UK general election (due at the latest by August 2029).
Perhaps just as relevant is the rise in long dated interest rates, that drive the cost of pensions, between 2021 and today. The cost of securing a certain level of income on the annuity market has plunged over the recent past. If the Pension Commission had been launched five years ago the cost of securing £1 per annum of retirement income for a 65-year-old male (with inflation and spouse protection) would have been around £35. A pot of £70,000 would have secured an annuity starting at roughly £2,000 per annum.
The cost of each £1 of annuity has fallen by over 40% and now costs around £20. A pot of £70,000 would now secure an annuity starting at roughly £3,500 per annum.
Pension income has become substantially cheaper to provide and thus the Pensions Commission should reflect on these higher rates and thus, probably, limit the increase in contributions.
Finally, of course we should note that the employer (and employee) contributions for auto-enrolment were phased in over three tax-years and any increase in contributions would likely be phased as well.
The overall picture for employers is that auto-enrolment contributions are going to increase and employers will likely be required to share that burden with their employees. However, the change is not likely to come soon (2030), will be phased in over a number of years and the increase is likely to be much lower than would have been considered only five years ago due to the radically lower cost of securing pension income in the annuity market due to higher interest rates.
Other areas that the Pension Commission will consider include:
The ultimate outcome of these above areas for investigation by the Pensions Commission seems unclear, but none would suggest lower pension costs!
-----
We hope you've found this article of interest.
If you'd like to discuss it, or any other matters where we may be able to assist you, please contact Richard Jones on richard.jones@puntersouthall.com
At Punter Southall, we have a team of highly skilled pensions, risk, compliance and legal experts with deep in-house practical experience. Get in touch if you would like a friendly chat with one of us.
Where we share what we’re thinking about and what conclusions can be drawn on everything from the work we do to the world around us. We hope you find our posts readable, relevant and thought-provoking.
SubscribeInsights