Workplace pensions look more like individual savings pots as too much risk is loaded onto members, Institute for Fiscal Studies (IFS) director Paul Johnson has warned.
Johnson, who spoke at a lecture on Thursday evening (6 June) marking the Government Actuary’s Department’s centenary, argued while current pensioners are on average better off than ever and the introduction of auto-enrolment (AE) is drastically boosting workplace pension savings, not everything is working well in the pensions industry.
In his speech, Johnson praised AE, mentioning the high volumes of members in employer-sponsored pension schemes, with seven in 10 now in these schemes. However, criticised low contribution rates and warned that defined contribution schemes “place all risk with the individual”.
He said that workplace pensions pose a real risk that “some will find they reach older ages having exhausted their pension pots [due to the pension freedoms] while others may be overly cautious and unnecessarily sacrifice their living standards in retirement.”
Johnson argued there is a “degree of hubris” around pension arrangements: “With current pensioners on average better off than ever, the introduction of what will become a near universal single tier state pension, and [AE] boosting workplace pension coverage to its highest ever rates, it easy to think that all is well. It is not.”
He said the “combination of bad design, bad policy, low interest rates and unanticipated increases in longevity” having “killed our defined benefit (DB) pension system”.
While 20 years ago, more than a third of private sector employees were members of DB occupational pension schemes, most of these schemes are now gone,” he said, suggesting the collapse can be “traced directly to a series of design problems”.
Johnson also talked about how he believes the industry is not prepared for the challenges of an ageing population. “Spending on health and pensions has risen without state spending growing overall,” he said.
“It seems unlikely that further substantial falls in other spending are possible to accommodate growing demands on the health and pension systems, implying either radical reform or higher taxes.”
In response, The People’s Pension director of policy Gregg McClymont said: “This analysis has much to commend but it omits the reality that many workers weren’t invited to the golden age party of defined benefit pensions.
“Auto-enrolment on the other hand has made a positive start towards creating a genuinely mass workplace pensions for the first time.
“The big challenge going forward is to ensure that all the pensions institutions offering auto-enrolment have the scale necessary to deliver efficiently, are governed in their members interest, and that contributions are adequate.”