Tomorrow's Pension

David Pitt-Watson FRSA, leader of the RSA's Tomorrow's Investor programme, recently gave evidence to parliament about some of the conclusions of our work. He argues that UK government policy is heading in the right direction but must ensure that it builds a pension system that meets 21st century needs.

The British pension system is not 'fit for purpose'.  It is not comprehensive, and it is very costly. This is why three years ago the RSA set up its Tomorrow's Investor programme, which has been investigating how best we can improve the system of private pensions in the UK.

The conclusions of the work to date are quite stark.  First it has shown that, if a typical young Dutch person, and a typical Briton were to save exactly the same amount for their retirement, the Dutch person would receive a 50 percent larger income in retirement.  Second, it has shown that while the government's new policy of auto-enrolment takes a step in the right direction, it has some gaps which, if not addressed, could prove very damaging to its objectives.

The Tomorrow's Investor work has supported the new government policy of auto-enrolment, which will begin next year. But this support comes with a big caveat; the current design of this system is deeply flawed.

So we were delighted when the Department of Work and Pensions' Select Committee, decided to investigate the problems Tomorrow's Investor had been raising, and invited the RSA to give evidence. This is parliamentary democracy at its best and there is much at stake; the outcome could determine whether the new system will indeed generate pensions for the 50 percent of employees who do not have employer provision, or whether flaws in its design could result in it failing.

In theory the government policy makes a lot of sense.  Over the coming years, most employees will automatically be enrolled into a pension. They can withdraw if they so choose, but the hope is that most will save, and their employer and the government will subsidise that saving.

In order to ensure all employers have a reliable supplier, the government has set up a new institution, called the National Employment Savings Trust (NEST). However it is subject to a range of restrictions, which mean it may struggle to meet every employers needs.  The RSA believes there is no public benefit from these restrictions. But there is a more immediate problem: the government is planning to abandon all consumer protections to pension suppliers who compete with NEST. We know of no developed pension market where such limited consumer protections exist. So a good initiative, which has taken years to agree, and which enjoys full cross party support, is put in jeopardy by lack of attention to detail.

So, what did the Select Committee evidence conclude? Paul Johnson, head of the Institute for Fiscal Studies and Chair of the review group appointed by the government gave evidence at the same time as the RSA. In response to the issues and solutions the RSA suggested, he said: “we are all agreed… it is almost a no-brainer”. Over the next few weeks, we will see whether, with pressure from MPs the government will now act.

More broadly, the RSA's research has shown that there are huge opportunities to improve the British pension system. 6.5 percent of our GNP is spent on private pensions. By adopting the Dutch system, we could improve its productivity by a full 50 percent.

So there is potentially a huge prize to be won here. In the introduction of auto-enrolment and NEST, the government is taking a first step in moving the British pension system in exactly the right direction. Getting the best pension system for Britain will be a real challenge over the long term.  So, ensuring that auto-enrolment does not fall at the first hurdle has been a particular focus of our recent work.  We are very pleased that our parliamentarians are now investigating the issue.

David Pitt-Watson leads the RSA's Tomorrow's Investor Programme.  He is Chair of Hermes Focus Asset Management.