How to defuse the pension timebomb

Another day, another smart report arguing for higher payments into our pensions. Standard Life and WPI Economics have published a paper saying that minimum contribution rates into workplace pensions must rise.

Today, workers contribute a minimum of 5 per cent of their salary to their pensions while their employer pays in 3 per cent. Not enough, the report says. Both rates should rise immediately to 6 per cent. Otherwise, it is said, millions of today’s workers will face poverty in retirement.

This is entirely sensible and right and in line with the consensus among pensions experts and pensions industry people. On the whole, we’re just not saving enough to provide us with the lifestyles we want in later life. Smart reports like the latest from WPI are good and valuable contributions to debate on this issue. (Disclosure: Matt Oakley of WPI is a friend and former colleague of mine.)

But reports such as this one also spectacularly miss the important point about pensions, describing trees in impressive detail but staying silent about the wider wood. That big point: no one cares, so nothing happens.

To explain it a bit more, let’s go back to that pensions consensus. Everyone in pensionworld agrees that workplace pension contribution rates should rise. Pension adequacy warnings are commonplace in the sector: it is widely accepted that many, many people aren’t saving enough. Definitions vary here, but to save you the detail, I’ll just point to DWP calculations from last year that show between 12.5 and 14 million people are undersaving. In some cases, that will just mean a nasty drop in income on retirement, but for some – low-income workers who don’t own a home – it is likely to mean poverty and significant pressure on public resources.

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In short, we have a pension problem approaching us. We also have a simple and effective tool to use to help address that problem. Auto-enrolled pensions really are a wonder of the modern age, a machine that has since 2012 nudged more than 10 million people into pension saving via their workplace. Today’s report, sensibly, talks about simply upping the numbers that are fed into the auto-enrollment machine to make workers and employers put more money aside for future needs. Simple, huh?

But the big question facing all such reports is this: if it’s such a good idea to increase pension contributions and if the need for doing so is so clear, why doesn’t it happen?

With all due respect to WPI and Standard Life, they’re not the first to make this case for higher contributions. There are dozens of reports making similar arguments from financial services firms, MPS, charities, think-tanks, academics and journalists. (I’ve probably been responsible for several of them myself.) Yet there is close to zero political will to make the change.

This is even odder when you consider that there isn’t any real political tension around pensions. It’s a fairly apolitical issue: relations between the pensions minster and shadow pensions minister are almost always warm and cordial, because neither side wants to score points on the topic. This means that they can work together calmly enough.

So we have expert consensus for higher contributions and fertile political conditions for a technocratic tweak to a technocratic policy that would deliver better lives for many people in the years ahead. Yet it doesn’t happen. Why not?

Bluntly put, because people don’t care about pensions. They’re complicated and boring and they’re about things that might be decades away. Obviously, that timeframe shortens as you get older, but it’s a fairly unusual 20- or 30-something who gives much thought to the amount of money they’ll have when they’re approaching 70 years of age.

Far more important to the typical voter are issues in the here and now: real wages and wealth today matter vastly more than incomes and assets in a retirement that could be 30 or 40 years away. And even the technocratic bits of our political system ultimately respond to public opinions and public priorities. For as long as voters don’t really think much about pensions, there will be very little pressure on politicians – of any party – to do sensible and necessary things on pension contributions.

Nor will there be much incentive for politicians to act. Where’s the political reward for people participating in the current electoral cycle to do something that will benefit voters in the 2040s and 2050s? A 25-year-old worker today might not start experiencing pensions directly for another 45 years – that could be ten general elections away. Even the most ambitious politician doesn’t expect their political career to last that long.

It also doesn’t help that the politicians and civil servants who set pensions policy don’t themselves rely on workplace defined contribution pensions for their own retirement incomes. They still enjoy very generous defined benefit schemes. It’s hard not to think that people who don’t have skin in the game are less likely to feel an urgent need to remedy a problem that doesn’t affect them. As a veteran of the MPs’ expenses saga, I sometimes wonder about the scope for the public to take a sharp interest in this disparity.

Pension contributions should rise. They should already have risen, in fact. And with every passing day, the case for the change gets stronger. But there is little sign of it happening.

Until today’s voters start to care more about tomorrow’s pension incomes, that sensible argument for higher pension contributions may well gather dust on the shelf. And while it does, the pensioner poverty iceberg currently visible on the far horizon gets a bit closer every day.