Recently, Fraser Nelson, Editor of the Spectator, hosted a roundtable lunch in the boardroom at 22 Old Queen Street, in association with Prudential. On the agenda was the question: ‘In our ageing society, can we afford retirement?’
In attendance were Fraser Nelson; Will Heaven, the Spectator’s Managing Editor; Elliott Mears, the company’s Head of Partnerships; and the following guests: Guy Opperman, Minister for Pensions and Financial Inclusion; Matt Cavanagh, Director of Group Government Relations, Prudential; Michelle Cracknell, Chief Executive, The Pensions Advisory Service; Huw Evans, Director General, Association of British Insurers; Tim Fassam, Director of UK Public Affairs, Prudential; Alan Mak MP; Will Sandbrook, Executive Director, NEST Insight; Tim Sharp, Policy Officer at the TUC’s Economic and Social Affairs Department; and Lord Willetts, Chair of the Resolution Foundation. What follows is a summary of the discussion.
Our ageing society is one of the most challenging policy areas of our time. In a way, it’s a good problem to have: the UK is a developed, prosperous nation. As a result, people are living for longer and longer. But the numbers involved show why it’s so complicated: there are already 1.6 million people aged 85 or over in the UK – including more than 10,000 over the age of 100. By 2040, nearly one in four people in the UK will be aged 65 or over. How we manage the impact of these changing demographics – on everything from pensions to health and social care to housing and taxes – will be near the top of the policy agenda for decades.
But it’s very easy to misjudge the policy answers. In 2017, Philip Hammond tried to raise £2 billion for social care by hiking national insurance contributions for the self-employed. He was forced to U-turn within a week, having unintentionally contradicted the 2015 Conservative manifesto. In their 2017 manifesto, the Tories again introduced an idea that took many by surprise. Elderly people in care would have to pay the full costs of it until their last £100,000 (though the money would be taken from their estates after death). The policy ticked a lot of boxes and was progressive. But it was the lottery effect that caused a storm. Those who needed the most care would be hit the hardest, potentially having to pay hundreds of thousands of pounds. So ‘dementia tax’ became one of the toxic phrases of the election (in part, I admit, thanks to The Spectator). It was proof of the importance of thinking policy through – and of not surprising anyone, voter or legislator, in this vital and sensitive area.
Guy Opperman, the Pensions Minister, argued along similar lines. ‘All the successes in pension or older age policy have derived from a cross-party approach,’ he said. ‘The fundamental failing arising out of the election was it wasn’t cross-party, it was sprung upon people in the middle of the election.’
In terms of people being able to afford retirement, he argued, one of the key problems was that so many employees ‘don’t do anything about their finances’. We are far better, as a country and as individuals, at keeping track of our health. Your GP will point out that there are various bits of your anatomy that need checking and will try to pre-empt problems. But we don’t do that in finances at all. ‘Nobody is engaging any part of the population and saying to them as part of a standard review: “Are you happy with your job? This is where you are going to be, this is your future, this is where your finances should be. Are you thinking about saving long term? What’s your pension going to be?” That would be like an MOT that happened between about 45 and 50 – it doesn’t cost a penny.’
The difficulty most people face, said Michelle Cracknell, Chief Executive of the Pensions Advisory Service, is ‘they don’t know enough about what to expect’. She agreed that as a nation, we are not good at talking about money. So we need some kind of intervention to get people thinking seriously about their pensions equation, and to give them the skill set through their working lives and in retirement so that they can make informed decisions. ‘You can make a decision about when you want to retire, how you want to retire but it’s an equation. How much you do today has an effect on when you’ll be able to stop doing that and when you’ll be able to retire.’ Fraser Nelson noted that in Sweden, people get a statement every year from the government which is frank about what they can expect from their pension, how it will vary depending on their retirement age, and also – if you think this amount is too low, what you can do to improve it.
David Willetts, Chair of the Resolution Foundation, said there were three problems. First, people underestimate life expectancy, partly because of how the ONS and others present the data (which is usually given as life expectancy at birth). If people were given a clear idea of how long they were going to live at the age of 40, he believes you would get a much more vivid and real debate. He also argued that the triple lock on state pensions – which guarantees that they increase each year by whichever is the largest of inflation, average earnings, or 2.5% – should be replaced with a double lock, removing the 2.5% guarantee. ‘We have got pensioner income as good as the median family income now, and there is no justification for anything on top of that,’ he said. Tackling pensioner poverty has been a great cross-party success in the past 30 years but if you are looking for where the poverty is now, it’s simply not concentrated on pensioners. Lastly, he argued that to reduce company pension deficits it would be helpful to move the uprating of all defined benefit schemes from RPI to CPI. Too many are still on the more generous RPI, which effectively means younger workers (who aren’t even members of these schemes) having to keep them afloat.
Tim Sharp of the TUC argued against removing the triple lock, or reducing the amount companies contribute to pensions. ‘We’ve done work on changes from the triple lock to an earnings lock,’ he said, ‘and the price of that is about 700,000 people, pensioners, in poverty by 2050. There are a lot of young workers today who are going to be relying on the state pension for a lot of their income so changing it has real consequences.’ He did, however, agree that ‘things like midlife reviews are a sensible way of understanding what you’ve got and of planning for the future.’
Some guests agreed that technology would have a significant impact on people’s understanding of their pension pot. One-page pension passports, which summarise in a straightforward way what each person holds, would help – especially if they were sent to people regularly. As would a pension dashboard, which, Guy Opperman said, would ‘automate all your pensions on to a single platform’, both state and private, giving the equivalent of open banking for pensions. A prototype exists, the technology is in development, and the government is working to bring it to fruition. Alan Mak MP argued that ‘having phone based, app based solutions would be the next step beyond the dashboard’ – and that the private sector would be key, since there are already so many successful finance apps such as Moneybox and Monzo on the market, which proved that both the technical expertise and the demand existed for them.
Matt Cavanagh, Director of Group Government Relations, Prudential said the pensions dashboard is potentially a very important point to help people themselves keep track of their pensions. It would also enable people to start to engage a bit more with the key question: ‘Okay, what else do I need to do?’ He argued: ‘One of the biggest problems we have is that people struggle to do the sums to work out what they need for retirement. If they have got those things they are more likely to engage with providers like the Pru and others to say, “Right, what can I do to optimise the amount of money I have?”’
Huw Evans of the ABI said that the main limiting factor to using apps, AI, and other innovations is regulation – often to do with tax avoidance, but not exclusively so. This affects the pension passport idea in particular, since personalising pensions recommendations to employees would involve giving fully regulated advice. ‘Some of these regulations are designed for a world where you are predominantly dealing face-to-face,’ he said, ‘and I think reviewing our regulatory environment and asking, “Does this work now, when we are thinking about algorithms and other ways to help people interact with their pensions and savings?” At the moment, regulation too often stifles innovation.’
One of the greatest challenges of the ageing society is a democratic one. Old people vote more than young people, so the government is incentivised to help older people more – or risk getting punished at the ballot box. Is there a way around this? Guy Opperman emphasised again the importance of cross-party work. David Willets spoke more radically, saying that when you are under pressure to increase spending on the welfare state – as seen with the recent debate over NHS spending, for example – you can’t exempt pensioners from making a contribution towards meeting those types of costs. ‘The days when you just dumped it all on the working age population are over,’ he said. Increased life expectancy as much as the boom in asset prices means that the past promises made to people about their pensions are now unsustainable.
The discussion turned to the steps that could be made to increase the contribution made by pensioners towards the maintenance of the welfare state. It could include, as Fraser put it, slapping NI on their earnings – though he doubted that would make much difference. A tax on people’s assets would be very tricky to pull off, too. The pension age could keep going up, especially given that an accurate UK life expectancy now is 94. Then there are free prescriptions for pensioners and the fact that more over-65s own second homes than any other age demographic, and the tax system is still extremely generous to them. Overall, where you find a set of detailed tax or benefit rules, you find an assumption that you have got to help old people. This, several guests agreed, should no longer be the case.
Things are improving, however, among the younger generation. Contrary to popular belief, they are saving and thinking seriously about their retirement. Auto-enrolment has seen an increase from 39% of the population who were saving for a pension, to 81%. And there are more nudge policies, rather than direct government interventions, that could lead to further improvements. Ultimately, Michelle Cracknell argued, a lot of the arguments will come down to the social contract and how it is managed. If people think something is being taken away from them, they will react defensively. So if we are to make necessary changes – increasing the retirement age, for instance – it is much better to start having such conversations sooner rather than later.
It is wrong, however, to expect magic bullet solutions. Even on social care – and a government green paper is coming on this – there will not be a single product that fits into the jigsaw and solves one of the most difficult policy problems in 21st century Britain. What it will take is greater engagement, leading to higher levels of awareness over the cost of care. From there, we can begin as a country to talk seriously about what sacrifices people will have to make to have the best retirement possible.