About the Pensions Reform Group
In 2002 we published a report Universal Protected Pension: The Follow-Up Report that set out a vision of a universal funded pension which, together with the Basic State Pension, would provide a retirement income generous enough to lift everyone ending a working life out of poverty throughout retirement.
Pensions Commission’s First Report:
The Turner Report made the five key points:
- We must act decisively to make good past failure.
- On present trends over 9 million people will face inadequate retirement income.
- People do not make rational decisions about saving.
- The UK’s pension system is complex, and for many low to moderate earners provides very poor or negative incentives to save.
- Trust in politicians, and both state and private pensions, is low.
Pensions Reform Group’s proposal:
Our proposal - the “Universal Protected Pension” - is structured around five principles:
- A Guaranteed Pension of 25-30% of national average earnings, with the first part of this guarantee coming from the basic state pension.
- Compulsion
- Redistribution
- Funded
- An Independent Governance Structure
Why a guaranteed pension of 25-30% of national average earnings? Because the primary objective is an enduring scheme that lifts all pensioners out of poverty. As a country we need to act decisively to make good our past failure to address the demographic challenge.
Why compulsion? Compulsory contributions are required to fund the guarantee.
Why redistribution? Redistribution is the flip-side of compulsion. The poor cannot save enough to provide this level of benefit, so redistribution is required. The better-off receive a guaranteed income in retirement, which they will increasingly value as traditional final salary guarantees disappear.
Why funded? The guarantee would be provided in part by the existing basic state pension and in part by a new funded arrangement. Funding has two great advantages. First, funding deals with the trust issue by giving members a personal stake in a tangible pool of assets rather than relying on an I.O.U. from the Government. Second, as the Pensions Commission argued, funding generates higher returns on average than a pay-as-you-go system.
The scheme would bring together the public and private sectors with contributions collected by the National Insurance Contributions Agency and then invested by private sector fund managers.
Why an independent governance structure? The operational independence granted to the Bank of England’s Monetary Policy Committee shows how successful independent governance structures can work for key policy areas. An independent trustee-type governance structure for this pension would be a radical departure from decades of politicisation of pensions. It would give people a trusted vehicle for their retirement savings.
Transition to the new scheme – how quickly can it be introduced?The key point is that we are providing a framework with two particularly novel features – funding and an independent governance structure. The detailed rules of the scheme will allow for a range of parameters to be adjusted including the level of the benefit, the treatment of carers, women, the unemployed and immigrants.
A radical scheme for future generations. We appreciate our proposal is bold and radical. It requires compulsion, redistribution, funding and a new governance framework. But we believe people would welcome this, and that new thinking along these lines is required to restore the electorate’s trust in pensions. Previous work on the proposal by the Government Actuary’s Department suggests the proposal is deliverable in the relatively short-term.
This is an opportunity to re-launch the state pension in a way that is relevant and accessible to people. By bringing together the investment skills of the private sector with the guarantee of fairness for all that only the state can provide, such a reform would be a 21st century solution.