We must stick to the Turner agenda to achieve decent retirement funding – but it is not clear freedom and choice helps says Lord Hutton of Furness, former work and pensions minister and adviser to Redington
There are lots of reasons to be optimistic about the future of retirement savings in the UK. Auto enrolment has helped millions of people to make it easier and simple to put money aside for their retirement. Government has focused recently on improving the governance of DC schemes – a really important issue if we are to improve value for money for scheme members. More generally, lifetime Isas may also help encourage a new climate of saving. It is early days for all of this but so far the results look positive.
But the future for DC remains a challenging one. I think there are three big risks ahead for all of us who want to encourage more people to start saving more for their retirement.
First, there remains a lack of consumer engagement in the whole issue. Pensions remain mysterious and complicated for many people. To overcome this problem we have to make saving easy and uncomplicated. This was the approach recommended by Lord Turner a decade ago. We should stick to this course because it is more likely to produce the right results. The more complicated we make financial decisions about retirement, the more we load on to the shoulders of savers themselves, the less confident we can be about whether people will be able to maintain their expected living standards in retirement. It is a moot point whether we can fit some of the more recent reforms – like freedom and choice – into the framework designed by Turner.
Second, despite the positive impact of auto enrolment, there is still a lack of consumer confidence in pensions. There are rarely ever any positive news stories in the media about pensions. This has left a negative mark on public consciousness. Ultimately, it is only the successful implementation of the Turner package that can turn things around. And by this I mean getting millions more people to the point where they can be confident about being able to enjoy their lifestyle choices in retirement. This will obviously take time.
In the meantime, we face the third major risk – an inconsistent approach to regulation. If success in this endeavour is a long term project, the danger is that policy makers often get tempted into doing things that have a more immediate short term impact. Generating a constant tide of change and regulation can create the appearance of action. Some of it is no doubt very laudable. We all want to ensure savers get value for money from their schemes. We want governance of DC schemes to be of the highest possible standards. We favour transparency and openness over charges. There has been something like a dozen consultations in the last year or so proposing a series of measures that could have a quite considerable impact on our pension system. We need to tread carefully here. The risk of a mistake is high. Good intentions don’t always result in good regulation.
My own view is that we should not seek to break with the fundamentals of the Turner consensus. Keep it simple for savers. Remove as many of the barriers to saving as possible. Don’t expect individuals to be rushing to engage with difficult choices over how to get the best value from their pension pots. Keep our focus now on improving outcomes for savers in DC – and this includes the vital question of how much are people saving for their retirement – and be prepared to accept the fact that this is a long term project.