The pension freedoms have had unintended consequences which should have been foreseen, Michael Johnson has said.
For this reason, he believes the pensions framework needs a radical shake-up with a move towards an ISA model.
Johnson, who is an independent research fellow at the Centre for Policy Studies, was one of the architects behind both Freedom and Choice and the Lifetime ISA (LISA).
Now he believes the removal of annuitisation as the forced pathway has meant longevity risk is borne by the individual, and that this is the wrong approach.
“There have been a number of unintended consequences [of Freedom and Choice] that I could not see, and I should have done, and this was brought home to me very fast,” he told delegates at Barnett Waddingham’s defined contribution snapshot conference on 21 September.
“If we think about annuities, by ending the annuitisation requirement, we have stepped away from the importance of socialisation and collectivisation of life expectancy. You get to 55 and you are on our own. I wish I had thought harder about that in 2010.”
Johnson said this realisation had led to some of his latest thoughts on future savings provision, and has recently argued the LISA and workplace pensions, including automatic enrolment (AE), should be bundled into one product: a Workplace ISA (WISA).
This product would have two segments, with employee contributions going into an instant access segment, while employer contributions would go into a separate section untouchable until age 60. Both sections would receive a government bonus of 25%, as is currently the case with the LISA.
“The end is approaching [for pensions] and it is going to do you a lot of damage,” Johnson continued. “What I have tried to create is a savings vehicle that enables the user to have some benefits of both of those polar worlds.”
Stating the WISA would be a “savings vehicle for your lifetime”, Johnson added: “This will help tackle the fears about rising opt-out rates as we start to ramp up [AE] contributions. I’m trying to put an end to the occupational pensions framework; it is self-serving. My vision for the LISA is it is the only savings vehicle that any individual will actually need.”
Alongside this, the state pension should be scrapped and replaced with a higher means-tested senior citizens pension, granted at age 80, he argued.
“I see the ISA world eventually swallowing the occupational pension world,” he continued. “I’m trying to tiptoe you towards a funded world. For Generation Y, ‘pension’ does not resonate. The Conservatives are waking up to that very fast.
“The Generation Y want to be cared for much more than they had been to date. I absolutely believe that pensions as we understand them are finished, not least because the next generation is not engaged.”
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