Ros Altmann: New thinking is needed on later life to keep the ‘grey pound’ in the black

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EVER wondered why pensions policy is so complicated? Well, the Government’s financial watchdog – the National Audit Office – has just provided some answers. It has reviewed the effectiveness of Government policy to support retirement incomes and highlights a lamentable lack of joined-up thinking. Its report shows there is no overall, cohesive responsibility for this vital area of national interest, with different aspects being run by different departments.

Although much of the responsibility for pensioner policy rests with either the Treasury or the Department for Work and Pensions, there are also 17 other Government departments or public bodies involved.

For example, the Treasury is responsible for personal pensions, private savings, some employer pension schemes, annuities and pension tax rules. The DWP is in charge of other types of employer pensions, national insurance, state pensions, pensioner benefits and pension age. Meanwhile, the Department for Business oversees employers of older workers, social care is under the direction of both the Department for Communities and Local Government and the Department of Health and fuel poverty falls under the Department of Energy and Climate Change.

Sometimes, policies in one area can undermine other departments’ efforts to improve pensioner incomes. As pensioner numbers increase, falling pensioner incomes may reduce overall spending in the economy, leading to long-term economic decline. The “grey pound” can be an important area of economic activity but pensioner policies need to work effectively to ensure optimal outcomes.

This applies particularly to the interaction between state pensions, private savings and retirement ages. The UK has one of the lowest state pensions in the developed world, so good additional private income in later life is vital. However, by relying heavily on means-testing pensioner support, the state pension provided by the DWP undermines the incentives to save provided by the Treasury. It also penalises those who want to work longer, because those with extra private income could end up losing retirement benefits that others without such income will receive.

Despite several much-needed and long overdue reforms being introduced in recent years, there is inadequate cohesion and vision. An over-arching structure needs to be articulated and managed to have maximum effect.

As an example, the removal of the Default Retirement Age sends a strong signal to employers and employees that longer working lives should be embraced – but intiatives for later life training and job support are lacking.

By encouraging longer working lives, many people could achieve higher later life incomes. Indeed, facilitating part-time work could change the whole concept of retirement itself. Retirement could become a “process” rather than an “event”, with workers cutting back gradually instead of suddenly stopping altogether. Sudden and total retirement is often unhealthy and a waste of resources, stopping people from earning more money that could improve their own lives and also benefit the economy. As people are living longer and staying healthier, scaling back but still staying engaged in the labour force becomes a realistic option for many.

Joined-up thinking on pension income is also urgently required. It is true that the proposed flat rate state pension after 2016 will help reduce the private savings disincentives entailed in mass means-testing, however this reform will actually result in lower state pensions for most people in future. This means more is required of private saving but introducing auto-enrolment into workplace pensions, designed to improve private pension outcomes, is inadequate. The forecast pensions from auto-enrolment fail to take account of the recent dramatic decline in annuity rates. Yet again, policy pursued elsewhere is undermining pensioner income as the Bank of England’s purchases of Government bonds have driven sharp falls in annuity rates.

In fact, there has been a general absence of policy for later life financial planning. Later life income is about more than just pensions, since pension saving cannot cover care costs. Saving policy has failed to consider the financial burden of social care provision. As the Government is reforming the social care system, it needs to also factor in the requirements of savings policy in this area. There are no incentives for social care saving and pensions cannot cover those costs. The Treasury and Department for Work and Pensions, together with the Department for Communities and Local Government and the Department of Health would all benefit if more money was set aside for social care by individuals and families.

Most people are not equipped to manage these complex decisions on their own. They need access to advice and information to be able to form a more realistic view of their later life income prospects. Yet policy has revolved mainly around the Money Advice Service, which has not reached the majority of the population. Incentivising financial education in the workplace would cut across many areas of retirement income planning.

There is an urgent need to ensure the right hand and left hand of government policy can work together, as improving later life income is an issue of national importance. If increasing numbers of older people have very low incomes, UK long-term growth will decline as the spending power of the population falls. I hope this report will pave the way for more joined-up policy-making in future – and perhaps even one department or Minister assuming overall policy responsibility for UK pensioners.