How to Fix Pensions – A Response to the IFS

Craig Dalzell


This week the IFS published an important report on the state of pensions in the UK. I encourage you to read it – if only because it highlights many of the same systemic problems that Bill Johnston and I identified in our book All of Our Futures (available in the Common Weal shop here). In short, they talk of the looming problems caused by the commercialisation of pensions in the UK, the reliance on individual savings and capital acquisitions rather than state social security and the extreme uncertainty caused by turning private pensions into little more than gambling against the personal clock of mortality. In this week’s newsletter I’ve decided to take you through the key findings of the report and outline our solution to the issue as it was raised in our book.

1. Many employees are only saving very little for retirement.

The report highlights that almost a fifth of employees do not save for their pension at all – many of them are low-earners who fall below the threshold for automatic enrolment. In our book, we highlighted autoenrolment as one of the few positive changes to the UK pension landscape in recent years but that has to be seen within the landscape of persistent low wages and, most recently, high inflation not being offset by wage rises. It’s no surprise that people are falling below the thresholds, or are saving a certain minimal amount which will almost certainly be insufficient for retirement or who used to earn and save more but are being forced to compromise their future sustainability to be able to afford to eat today. Almost 90% of employees are saving less than the 15% of salary that the UK Pensions Committee thought was a minimum adequate amount. That is a sign of a system so badly broken that it must surely be fixed at all angles.

2. Fewer than one-in-five self-employed workers are saving in a pension.

And this number is rapidly declining. The UK’s political landscape frames self-employment as some kind of aspirational pioneering of entrepreneurship but the reality for many is that it’s a response either to the casualisation of labour (witness all of the zero-hour and gig companies who benefit mightily from declaring their workers to be self-employed so that the company can specifically avoid paying things like pensions), to late-stage hypercapitalisim’s need to monetise EVERYTHING (it’s not a hobby, it’s a potential side-gig…unless you’d prefer to rent out that loft you’re not using for someone else to store their stuff in, or to live in, or to work in?) or to the sheer desperation of not being afford to live without some form of additional income (which is why so many people are turning to self-employment as they approach or even move past retirement).

Both of the above problems are basically one and the same. The UK is a low pay country. You are paid far too little for your work, which in turn means that you cannot afford to pay others for theirs. Living with an artist and being a freelance writer myself (my own side-gig outwith Common Weal) means that I’m all too aware that finding someone willing to pay for the time, effort and expertise that goes into especially any kind of creative work is only slightly harder than finding someone who is able to pay it even if they wanted to. Part of the solution in our book is to end the rampant profiteering that has seen companies break the link between productivity and wages but also to give everyone a Universal Basic Income to ensure that we can live a decent life without worrying about making it through the month and that we can then afford to make things, enjoy the things that others have made and to actually live life.

3. Most private sector pension participation is in the form of defined contribution pensions.

The defined benefit pension – one based on a fraction of average or final salary – is basically gone in the UK. Private pensions are now little more than glorified bank accounts and it is up to you and only you to make the “best choices” about how and where it is invested despite the fact that you are very likely not an investment expert and the people who are are all too willing to cream off the lion’s share of the profits. The IFS report rightly points out that there is no risk-sharing between fellow workers – thus less incentive to use collective bargaining to improve deals – and much less risk being borne by employers – reducing their incentive to care at all. High profile cases of unscrupulous employers raiding the company pension account make the headlines because they are so high profile and affect so many people in one place. A fund manager upping their annual fee by a fraction of a per cent and thus raking in tens of thousands of pounds from every account in their fund probably isn’t noticed at all because you don’t really read or understand the annual balance sheet letter or you’ve changed jobs so often that you’ve forgotten that you have that pension at all.
In All of Our Futures we strongly called for the return not just of the emphasis of a state run pension (in the UK, only around 50% of average retirement income is drawn from a state or public pension with the rest coming from private pensions or capital investments like downsizing a house – in contrast, in some Nordic countries, around 90% of pension income is derived from state or public pensions) and while we’re neutral in the book on whether we should push for defined benefit or defined contribution pensions (though see Jim Osborne’s advocacy for the former here) we do think we need a Swedish-style “single-payer” pension fund, run by the state, that you can take with you from job to job and that is ultimately controlled via the nation’s democracy for maximum solidarity.

4. Increasing numbers approaching retirement live in more expensive, insecure, private rented accommodation.

This was a major issue highlighted in our book and on top of all of the social and welfare issued caused by predatory private renting, even on top of the affordability of it, the inability for the coming generation of retirees to have been able to secure a social-rented home or to have bought a house blows a major hole in the UK’s retirement strategy. I mentioned earlier that only around 50% of an average retiree’s income is based on the state pension. Much of the rest is based on “capital investments” which for most people basically means “the housing ladder”. The “Right to Buy” generation bought a social house on the cheap, used escalating prices to buy a bigger one…or several to rent out…and now they’re retiring, selling up and reaping the rewards. The generation after who couldn’t afford to do that (because of low pay and the fact that most of it was going to their now-landlord) are not building that kind of investment either.
The solution in our book is essentially to cut the private housing market off and return to long-term stable housing in social rented homes that can be afforded well into retirement. This should be coupled with a housing strategy that grants the “right to community” so that you have the ability to modify your home to suit changing needs and requirements or, in extremis, you have the right to move to a more suitable home without having to leave your community and uproot your social connections.

5. Pension ages are increaseD – but longevity is not.

Almost unique in the developed world (with the US and its rampant health issues being a standout counter example) the UK is losing hard-won longevity gains and, worse, is seeing life expectancy start to decrease (to the celebration of pension fund managers). We have also seen the stagnation of healthy life expectancy, resulting in people being forced to work despite reduced ability to do so. We need a comprehensive plan to help us age better and in better health (check out the Health chapter in our book Sorted for instance) but what we cannot do is do what the UK Government is planning to do and just patch us up so that we can be kept on the work line for just a few more years before we fall apart (preferably before the pension fund managers hit break-even on that annuity they sold us).

6. Demographic and other pressures mean that spending on state pensions is mounting

This is an argument that we entirely reject in the book as being based on deliberately false accounting. The state pension is framed as something that is paid out of the National Insurance of workers and is thus something that is “due” to pensioners based on their past contributions and “affordable” only due to workers today. The “mounting pressure” being due to the demographic transition that Scotland (and every other country on the planet) is moving through which shall, for the next few decades, see a drop in the ratio between number of workers and number of pensioners. This “Old Age Dependency Ratio” is used to justify increasing pension age to convert retirees back into workers but in actual fact, while the state pension is calculated based on number of years of National Insurance paid, it is ultimately backed by the exact same Consolidated Fund as all other government spending comes from. There is absolutely nothing stopping the Government realising that a pension is just as affordable if backed by taxes on workers as it would be if backed to the same amount of tax on corporations, or land, or pollution or the robots who stole our jobs. It is up to Government to manage the demographic transition by looking at where income and wealth is flowing, not to just assume that pensions are unaffordable because they don’t want to tax their mates.

7. Those retiring with defined contribution pension pots face considerable difficulty and risk in managing their finances through retirement.

This is linked to many of the above factors where we are forced to take on more and more responsibility for managing pensions we don’t understand so that we can afford a retirement of uncertain length while in health of unknown state of decline. It is almost impossible to budget a defined contribution pension to balance between not running out of money right when expenses like care start to mount or living a miserly lifestyle not doing any of the things that you were too busy to job while working.
Again, this is where a Universal Basic Income coupled with an actually adequate additional state pension would remove much of the uncertainty facing us in what should be our proudest years.

8. While current pensioners are still doing well on average, and many of the recommendations of the Pensions Commission have been successfully implemented, the future looks risky at best for many current workers hoping for a comfortable retirement.

This is the crux of the problem facing the UK. In All of Our Futures, we identified one issue being the time horizon of politicians who facing demands of elections in a few years while making decisions that will only affect people decades in the future when they are no longer in office and possibly not even alive to see the results of their efforts (for good or ill). We need to stop treating pensions as an issue that can be tweaked according to the newspaper headlines of the week and build a system that is designed for the lifetimes of those not even born yet. Not only that, we need a much more holistic approach to policy that doesn’t silo pensions off into its own box but does consider the implications of everything from health policy to housing policy and how they, in turn, are impacted by pension policy. It’s not an easy job and our book only takes us part of the way there in terms of implementing the solutions it suggests but it is a job worth doing so that we can all, all of us, live in a country that we’re proud to grow older in.

2 thoughts on “How to Fix Pensions – A Response to the IFS”

  1. It is well known in the pensions world that DB pensions provide a better retirement income than DC pensions. All the experts admit this but are at a loss as what to do about it. Most of what you say in this article Craig points to a need to restore DB/earnings related pensions so maybe your position is not as neutral between DB and DC as you have suggested previously. You seem to agree with me that we need a state backed national pension fund. I have done a lot of work on how to create one but it is lying in limbo just now as it needs someone to share it with.
    The other aspect of a NPF is also how the funds are invested. Neither DC nor remaining DB schemes invest in ways which support the development of the productive capacity of the economy and instead buy and sell financial assets in speculative trading activity. That has to change so that the future financial claims of retirees on the economy can be met. A NPF would have the risk capacity to invest long term in productive capacity in the economy as well as deliver an earnings related pension to all. A NPF pension integrated with a state pension could replace a flat rate state pension plus private pension to deliver a retirement income based on pre-retirement earnings. As long as the state pension is a flat rate pension there will always be a large number of people who want a second source of pension income because otherwise their income takes a big fall when they finish work. For me the solution is to reverse the 2 “pillars” so that the NPF pension functions as “Pillar 1” and the state pension functions as “Pillar 2”. For example the NPF could be designed to deliver a pension of (say) 50% of earnings (based on a full employment history) and that could be topped up to (say) 80% by the state pension. The chosen “replacement rate” (ratio of pension to earnings) is a matter of democratic choice and that choice then sets the foundations for the design of the scheme. We really should be talking about this.

  2. I would suggest that, for most people, we need to think about pensions as being deferred wages and ensure that employers are legally required to pay a set proportion of each worker’s monthly or weekly income into a secure pension scheme, in addition to the actual wages they pay their employees.

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