Increased support for pensioners could contribute to intergenerational tensions unless also accompanied by additional support for younger workers.Daniela Silcock
05 December 2019
How could the 2019 general election affect pensions?
DANIELA SILCOCK: Whoever wins the election will have some thorny pensions issues to wrestle with
The Policy Institute is producing a series of comment pieces analysing election manifesto pledges from the different parties across a range of policy areas. Read the full series here.
The general election is being held during a time of significant change in the pensions landscape, and it will have an effect on what direction that change takes. Some of the current trends are the subject of the Pensions Schemes Bill 2019-2020 that was making its way through parliament when the election was called. This Bill covered, among other things, legislation allowing for a new kind of risk-sharing Defined Contribution scheme and a framework for the operation of new pensions dashboards, which will allow people to view all of their pension pots in one place.
The Bill also provides new enforcement powers to the Pensions Regulator and places new obligations on the trustees of Defined Benefit schemes. Most parties have stated an intention to reinstate some or all of the legislation in the Pensions Schemes Bill, but have also turned their attention more widely to other issues in the pensions arena. Almost all parties have mentioned the need to ensure pension scheme investments are sustainable and the Conservatives believe that pension fund capital could be used to support the development and commercialisation of new scientific discoveries.
Most parties agree that the triple lock inflationary mechanism for the State Pension should be maintained, though they do not stipulate whether this retention should extend beyond the next parliament. There is also widespread support for a cap on lifetime care costs, but the details of these polices need further development.
Parties are mainly in agreement over supporting the self-employed to save more into private pension schemes, given they’re currently ineligible for Automatic Enrolment and save at very low levels – data from 2014/16 shows that just 37 per cent of self-employed people aged 40 to 59, compared with 79% of employees were saving into a private pension.
Regarding the women affected by the State Pension age rises, both Labour and the Liberal Democrats discuss compensating them, while the Conservatives do not mention the issue in their manifesto. The manifestos do not specify the extent of potential compensation; full compensation through restoring State Pension age to age 60 for women born between April 1950 and April 1961 could cost around £77.2 billion.
So, what do these election pledges imply for the future of pensions policy? One takeaway is that regardless which party wins the election, pensioners will receive significant state support through retention of the triple lock and a cap on lifetime care costs. Further expenditure could occur if a party other than the Conservatives wins, through compensation for women born in the 1950s. Labour have pledged to go further for future pensioners and stop any State Pension age rises beyond age 66 (rises to age 67 and 68 are already legislated for). Keeping State Pension age at 66 could cost the government around an additional 0.3% of GDP (c.£6.5 billion) per year from the mid-2020s, in current terms.
Increased support for pensioners through the above means could make a significant difference to the lives of many people aged 65 and over for whom poverty is on the rise, from 16% in 2011/12 to 18% in 2017/18. However, increased support for pensioners could contribute to intergenerational tensions unless also accompanied by additional support for younger workers.
One area of additional support for younger workers which is not mentioned in manifestos but is likely to be a significant area of policy interest, is the increase of contributions under Automatic Enrolment. The current minimum requirement to contribute 8 per cent of band earnings is unlikely to be sufficient for the majority of people when it comes to achieving a retirement income which replicates working life living standards. A median earner contributing 8 per cent into a pension scheme every year from age 22 until State Pension age would only have a 50 per cent chance of achieving this standard from private and State Pension income. Several policy proposals have been floated to help address contribution levels, for example, increasing minimum required contribution levels under Automatic Enrolment, or automatically increasing individual contributions when people receive pay rises or after a certain period of working. The government has already announced an intention to drop the lower level of the contributions earnings band to £0 during the mid-2020s, which would increase the level of contributions made, particularly for lower earners.
It's clear that whoever wins the election will have some thorny pensions issues to wrestle with, such as how to balance the costs of care between the individual and State, and whether women born in the 1950s should be compensated for being given insufficient time to prepare for State Pension age rises and by how much? There will also be a balance to strike between helping current pensioners to stay out of financial deprivation while also assisting tomorrow’s pensioners to prepare as best they can for retirement.
Daniela Silcock is Head of Policy research at the Pensions Policy Institute