Pension panic
By now everyone is probably familiar with at least the outline of the pensions meltdown that forced the Bank of England to intervene in bond markets last week… or at least has been confused about what liability-driven investment strategies actually are.
While the scare that pension funds could collapse came as a result of high gilt yields — increased selling UK Government bonds, lowering their price, forcing pension funds to sell gilts, pushing prices lower, etc. — it revealed deeper problems that had been festering under the bonnet of the UK economy.
These problems were not unforeseeable. The Financial Times reported yesterday that the Universities Superannuation Scheme, the UK’s largest private-sector pension scheme was warned in February that
“increase in leverage may introduce potentially significant risks into the scheme in a period of high market volatility”.
But they increased their exposure to such risks anyways.
Inadequate savings
There is another foreseeable problem with pensions that few people are talking about. This one relates not to how the fund is managed, but to how workers put money in… and therefore how much they’ll be able to take out when they need it.
“Protecting pension savers” was the subject of a report published by the Work and Pensions Select Committee right as the turmoil was unfolding in financial markets last week.
The Committee, chaired by Labour MP Sir Stephen Timms, is concerned that British workers are not saving enough money in their pension funds to have an “adequate” standard of living when they hit retirement.
The Committee report praised the auto-enrollment scheme — where employers and employees automatically contribute to a pension scheme, unless the latter opt-out — which has been in place since 2012 and has increased the number of eligible workers saving in a pension from 44% in 2012 to 86% in 2020.
However, they are concerned that workers are not aware that the minimum contribution itself will not be enough to provide an “adequate” standard without voluntary top up payments, or if they are, they are choosing not to make those payments.
Recent research — based on data from the ONS’ Wealth and Assets Survey — has shown that, between the state pension and workplace pension savings, most people in the UK “are not likely to produce adequate incomes in retirement”, and 78% of households will not meet either “moderate” or “comfortable” standards in their retirement.
But who defines what is “adequate”, “moderate” and “comfortable” as a standard of living?
Gig economy
With lockdowns having forced many people to use up savings and other assets to stay afloat during the Covid pandemic and now the cost of living soaring, the “adequacy” of preparedness for retirement is not likely to improve anytime soon.
More broadly, changes to labour patterns, such as increased casualisation in the gig economy and greater self-employment through the internet, have also deepened the problem of not enough people saving not enough money for their retirement.
The Committee heard evidence from Uber — along with other companies, NGOs, trade unions and state bodies — the taxi app which was forced to pay pensions to its drivers back-dated to 2017 after a UK Supreme Court ruling on Uber-drivers’ employment status in March 2021. Recently Uber has been running ads trumpeting these basic provisions for their workers.
Subsequently, the Department for Business, Energy & Industrial Strategy published guidance on employment status in July this year, which noted:
“Recent court cases have shown that the purpose of employment law is to protect those working for others and regardless of whether you work in the gig economy, if you satisfy the tests around employee or limb (b) worker status you will be entitled to the corresponding statutory employment rights and protections (as described in the Employment rights table.”
Uber told the Committee that “better enforcement arrangements are needed to ensure workers get their pension rights”; that is, their competitors should be made to comply with the same standards so they can’t undercut the old disruptor.
The report calls on the Government to
“bring forward an Employment Bill for parliamentary scrutiny as soon as possible to increase the legal protection available to people in low-paid work and the gig economy.”
However, as the Committee’s report shows, while auto-enrollment for gig economy workers may be a positive step, it simply returns us to the problem that the auto-enrollment scheme is not going to provide an “adequate” pension for people.
What Conservatism is about
The Committee has two main proposals for tackling this:
to increase the minimum contribution from both employers and employees, so that the total shifts from 8% to 12%
to put more money into guidance services that help people make decisions about putting more money into their pensions at various stages throughout their working life.
The risk with the first recommendation is that as workers start to see more money coming out their paycheck — and with rising costs in the present — the number of workers who opt-out (currently low at around 1 in 10) may start to increase.
The risk with the second recommendation is that boundaries between “guidance” and “advice” may become blurred, and this is something pension schemes and employers are wary of doing.
Furthermore, it’s not clear how both of those recommendations will gel with the political philosophy of the current Government.
In her speech to the Conservative party conference this week, PM Liz Truss said:
“I believe that you know best how to spend your own money, to get on in life and realise your own ambitions… that is what Conservatism is about… So, I’m not going to tell you what to do, or what to think or how to live your life.”
Therefore, the present Government may not be too keen on taking up the Work and Pensions Committee’s recommendations.
Liz Truss’ preferred way to increase pension contributions will not be to increase the minimum contribution on auto-enrollment schemes but boost wages through economic growth.
However, amid fears that the Government are soon to announce cuts to benefits to balance out their tax cuts, Truss has repeated that she will maintain the triple lock on pensions — the rule that the state pension must rise each year in line with the highest of three possible figures, inflation, average earnings or 2.5%.
Despite that increase in the state pension, the problem Britain faces with supporting an ageing population will not go away — it is the proverbial can that each Government kicks down the road… until they can’t.
While financial experts work out how to stabilise pension funds exposure to bond markets, the Work and Pensions Committee’s warning about massive unpreparedness for retirement among the current working population poses a looming challenge that no one really knows how to solve, with widespread consequences for the economy from fiscal policy to consumer demand and beyond.
Unlike last week’s pensions-related crisis, the next one may not be so easily controlled by the Bank of England.