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Huw Evans - The Pensions System in the UK is Not Broken

Huw Evans - The Pensions System in the UK is Not Broken

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Published by onenationregister
Huw Evans challenges the view that the UK pensions system is broken .
Huw Evans challenges the view that the UK pensions system is broken .

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Published by: onenationregister on Apr 30, 2013
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The pensions system in the UK is not brokenBy Huw Evans
Pensions policy is an issue that stirs violent passions in the hearts of atiny minority, yet few public policy areas are so important to get right forthe vast populace of working Britons. We have an ageing populationand insufficient pension saving, a small group of fiercely engagedstakeholders yet an apathetic population at large. How can we resolvesome of these challenges and where does responsibility lie betweenpension companies, employers, individuals and politicians?The starting point for this debate has been that the pensions system isbroken and needs fixing. If we accept the premise of the argument,Labour has some explaining to do as the party in government for most of the last 16 years, responsible for very considerable changes to both DBand DC pension schemes.Happily for the reputation of a government I served in as a special
advisor, I don’t accept the premise. This country is home to one of the
most stable pensions industries in the world, providing workplace andpersonal pensions to tens of millions of adults. With the introduction of auto-enrolment and the establishment of NEST, the UK has enacted oneof the most radical pensions reforms in Europe designed to encourageand provide pension saving for an additional 6-9 million people by 2018.All this is built on the foundation of a long-standing state pension systemwhich provides a basic safety net against poverty and is being simplifiedby the current government to run alongside auto-enrolment in a waythat will help avoid pension savings causing uncertainty over meanstesting. These are huge advantages that we gainsay at our peril; what isneeded to overcome the problems that remain is pragmatism, not petschemes driven by dogmatism.
What then are the necessary next steps? All of us have a part to play:
Pension Companies:
UK insurers have to ensure the successful deliveryof auto-enrolment, continuing to work closely with employers andemployees to maximise take-up and minimise drop-outs. We havestarted well
with drop- out rates so far at 10% or less - but the biggestchallenge comes with the smaller companies that start to be auto-enrolled over the next two years. Just as importantly we have tocontinue the work we have started to explain charges & fees in a waythat customers understand with full transparency of the costs. Chargeshave now been falling for over a decade with the average new defaultworkplace scheme having an Annual Management Charge of just 0.52%but it is vital for the credibility of pension saving that scheme chargesare as low as possible, especially when growth is subdued. The pensionsindustry also has to continue to be vigilant about fund performance andhigh pay in the companies it invests in. But it is nonsense to suggest, asMichael Johnson does, that the pensions industry is relaxed about
excessive pay in the companies it invests in; what was last year’s‘Shareholder Spring’ if not a protest about those very issues? As for
returns, well of course they have been depressed during the worstfinancial crisis since the 1930s. But as funds invested for the long term tomaximise return over a cycle and preserve gains as retirementapproaches, pension funds remain a critical way for people to saveprofitably for retirement, with products provided by an industry that iscontinuing to reform to meet the needs of the modern world.
Employers are also critical. The old DB schemes with typicalcontribution levels of up to 20% may have become unaffordable as stockmarket returns have fallen, the basis of pension fund taxation changedand pensioner longevity increased, but employers still have a clearethical responsibility to their workforce to contribute the maximum theycan afford to pension schemes, not the auto-enrolment minimum. Theyalso have a duty
which many, encouragingly, have demonstrated so far
to explain the benefits of pension saving to workers to encourage hightake-up rates. With FSA reforms to the Independent Financial Advisorsystem making personal financial advice unaffordable for many,employers also have a critical role in facilitating financial advice beinggiven to their workforce so they are equipped to take informed decisionsabout their financial planning.
But to be truly successful in building a successful savingsframework for the future, individuals
all of us
also have to take adegree of personal responsibility. No pensions system in the world cansuccessfully deliver good retirement outcomes for individuals withoutpeople themselves taking a degree of responsibility for their post-workincome. This means saving as much as possible, sticking with it evenwhen market fluctuations temporarily depress returns and working foras long as possible to maximise the pension pot. A contribution levelrising from 8% to 12% will increase an average pension pot by 50% overthe lifetime of the scheme, while deferring retirement even for a fewyears can make a big difference to the income available. Bothcontributing more and working longer are in the hands of the worker topotentially do something about.
Finally political leaders have a key part to play. By setting atax system that continues to incentivise people deferring their take-home income into a pension scheme
and by not changing the rulesevery couple of years. By being honest with the public about theconsequences of an ageing society, including that without saving more,future generations will be less well off than current generations for thefirst time in human history, not least because of the substantial carecosts that come with living longer. Most of all, by working across partylines, as was done successfully with the introduction of auto-enrolment,to ensure that this most long-term of government policy areas is built onpolitical consensus.All of us, therefore, have a lot to get right. The pensions system in theUK is not broken but it can and must improve to meet the verysignificant challenges of the future. Pension providers are committed tothe change agenda but it is a journey that insurers, employers, workersand politicians must take together, avoiding some of the hyperbole anddivisive language which sometimes passes for stakeholder debate in thisarea. We all share the future and it is in all our hands to ensure we saveenough to enjoy it.
Huw Evans is Operations Director at the Association of British Insurerswhich represents the long-term savings and pensions industry. Heserved as a special advisor to the Labour Government from 2001-06,having worked for the Labour Party 1996-2001.

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