The Pensions Commission, established in 2002, was able to achieve such a unique consensus and went on to bring us AE. Getting a new consensus today requires a similar approach.
The macroeconomic dynamics of our pension system mean that any major policy decision made by the government concerning pensions and retirement planning can have significant implications for our economy more broadly. Around £110bn is saved into private pensions each year.
That’s money from employers that they can’t invest in their businesses, and from employees, that they cannot spend in the shops.
If we increase pension savings to the level that is required, that figure will increase substantially, diverting more money from business investment and consumer spending.
Pension assets in the UK exceed £3tn and the government is already thinking about how pension investments could play a compensatory role in the UK economy.
Retirement benefits paid out by the Department for Work and Pensions are forecast to be £140bn this year, of which £125bn is the state pension. Most of the remainder of the spend is on housing benefit.
However, with fewer people getting onto the housing ladder, this relatively small proportion of the spend could rise significantly in the future.
Finally, the UK’s pensions tax relief bill is the same size as our defence budget, roughly £55.5bn. It seems unlikely that a significant increase in the statutory level of saving under AE could be achieved without some form of accommodation on tax relief.
With tax-free cash now frozen in monetary terms, any further tweaking of pensions tax relief could impact the attractiveness of pensions relative to Isas, for example.
It’s a complex Venn diagram, where the myriad policy challenges within pensions overlap with other savings challenges in terms of accumulation and with other assets and income streams in retirement.
Additionally, the microeconomic impacts on individuals and households are intertwined with the macroeconomic impacts on our country.
The way forward will only be found by considering it all together and a way forward will only be deliverable if it commands broad support.
At Scottish Widows, we are joining our parent company, Lloyds Banking Group, in calling for the establishment of a Long Term Savings Commission to consider financial resilience in the round: pensions, housing, short-term savings, investing and the role of protection products and insurance.
Pete Glancy is head of policy at Scottish Widows
