The Government's pension reforms - Work and Pensions Committee Contents

Written evidence submitted by Dr Ros Altmann, Saga

This evidence concentrates on two areas of the current Pensions Bill.

—  Automatic enrolment into workplace pension schemes.

—  Increasing state pension age.

1.  Automatic enrolment into private pensions is unsafe in the current UK state pension system. The Government knows that many hundreds of thousands of individuals will be enrolled into a pension scheme that could prove unsuitable for them, and will end up losing their private pension in the means-test on retirement. Most of those affected will be in the NEST target group - low-earning women, those with incomplete NI records and older workers, particularly those who rent rather than own a home.

2.  Official studies (2009, DWP Research Report 558 "Saving for Retirement" and 2010, "Making Auto-Enrolment Work") suggest that around 5% of those enrolled will not get value from their contributions on retirement. This means approximately around 30,000 people a year, or 550 each week will reach retirement and potentially have no value for their pension savings. Their money would have been effectively confiscated from them and their employer contributions completely wasted. In addition, the conclusions of the "pays to save" analysis conducted by both the previous Government in 2009 and the 2010, Making Auto-Enrolment Work, study significantly under-estimate the scale of this problem because they use overly optimistic investment return and annuity assumptions. Using more realistic assumptions (reflecting recent experience and likely future returns) far more people would find little or no value for their savings. The assumption that employer contributions are "free money" is also questionable.

3.  These official studies assumed investment returns of between 1.5% and 3% above inflation. Such returns are unrealistic and unreliable. Even the long-term average equity risk premium is only considered to be around 2% real return above risk free rates. Index-linked gilts currently offer negative real returns, so investing cautiously (as is likely to be the case with NEST at the beginning) will not deliver even close to a 1.5% real return. Even investing the entire pension fund in equities cannot reasonably be expected to generate 1.5% or 3.5% real returns after expenses and anyway this would entail such high risks that there is a significant chance of a much worse pension outcome. The inflation assumption in these studies is 2%, which may turn out to be far too low. In addition, assumptions about annuity rates are unreliable. The 2009 study assumed, annuity rates would be constant in future, whereas rates have already worsened by around 15% since then. The 2010 study only used level annuity rates, not inflation-linked and did not assume a worsening of those rates, while rates have indeed been worsening. Using just a level annuity is not an appropriate yardstick to determine the value of the future pension, since it will be severely eroded over time.

4.  Therefore, the basis on which pension saving is being promoted to lower or moderate earners is already flawed. The analysis suggesting they will benefit from pension saving relies on questionable assumptions and even that analysis shows that 5% of people will not benefit from pension saving.

5.  Government says it will rely on individuals to self-select whether they should opt-out. But it knows most people, especially in the target groups are unlikely to understand pensions and will trust that the Government itself would not enrol them if it was a bad idea for them. NEST will have an implicit official endorsement.

6.  If financial advisers encourage people to invest in financial products that could be unsuitable for them, without proper risk warnings, the adviser would be liable to compensate them for any losses, as people would have unwittingly bought unsuitable products on a false premise. Claiming that the advisers did not know in advance whether those particular individuals would lose out is not an adequate excuse for failing to properly warn of the potential risks before they invested.

7.  Will the Government ensure the "at-risk groups" are properly warned of the risks? If so, then these groups would presumably opt out, yet these are some of the core target groups for auto-enrolment. If they are not properly warned of the risks, then the Government itself is behaving like unscrupulous financial advisers and may have to compensate victims who lose out. Neither of these scenarios is optimal. So what can the Government do?

8.  Radically reform state pensions, paying £140 a week: As long as state pensions undermine private pension saving, it is not safe to proceed with auto-enrolment of at-risk groups. Steve Webb MP, told Money Marketing Magazine in April 2010 "Real concern remains about the impact of mass means-testing of pensioners on incentives to save in NEST…It will have to be addressed before 2012 if the launch…is not to be undermined by doubts about whether it will be worthwhile saving". Currently, around 70% of women have an incomplete NI record. This will rise to 90%, which still leaves many people at risk. Ending mass means-testing of pensioners, would alleviate suitability problems.

9.  Disregarding workplace pensions up to a certain level from any means-test calculation, would also remove suitability problems, or making pensions "undoable" so that anyone reaching retirement and losing their pension could undo the pension instead.

10.  Alternatively, allow people to be auto-enrolled into either an ISA or a pension, rather than just pensions. This would still kick-start the savings habit with help of employer contributions, and get people used to saving before having to lock their money away for decades. This would particularly benefit younger and older workers and women.


11.  Government has reneged on its Coalition Agreement which promised "the date at which the state pension age starts to rise…will not be sooner than 2016 for men and 2020 for women." Women's state pension age was already rising from 60 in 2010 to 65 in 2020 under the 1995 timetable. It is suddenly being increased even further starting in just five years' time in 2016, whereas the previous changes gave 15 to 25 years' notice.

12.  I have never had so many angry emails and letters on any subject—Saga has been inundated with pleas for help from women who had quietly accepted their pension age increasing from 60 to 63 or 64, had made their financial and work plans accordingly, and suddenly find the Government has moved the goalposts on them, without giving them reasonable time to prepare.

13.   These proposals entail both age and gender discrimination. They affect women more than men and affect women of a particular age more than women or men of other ages. They disproportionately impact women in their late 50s, many of whom are already retired or caring for relatives and have made careful financial plans on the basis of a legitimate expectation (as expressed to them by Government) that they will receive their state pension at a particular age. Some tell me they took financial advice and made irreversible retirement or annuitisation decisions and cannot afford to lose their expected state pension income.

14.  The unfairness of these proposals can be encapsulated as follows: Between 2010 and 2020, women's pension age will rise by six years, while men's pension age increases by just one year.

15.  Women's pension age starts rising from 2016, on top of already ongoing increases. Men's pension age does not start rising until 2018.

16.  Around 500,000 womens' pension ages will increase by more than one year, 300,000 by over 18 months, 33,000 by two years. No man has his pension age changed by over one year.

17.  Men have eight years' notice of a one year change, while women are given seven years' notice of up to a two year change.

18.  Two women, born a year apart, will have a three year difference in pension ages. For example, C Fowler, born in April 1954, is delayed to 66, while her sister, born in April 1953, will receive her pension at 63.

19.  These changes mean shortfalls of over £10,000 for many women, who simply will not have time to make alternative financial arrangements to offset those losses. They were relying on that money. As S Hunter put it: "It is like them going into your bank account and taking out thousands of pounds of your savings".

20.  The Government announced these plans unexpectedly. Its paper assessing the impact of the decision admits "the proportionate loss of lifetime pension income for women affected…would generally be greater than for their male contemporaries", yet it then merely asserts that the change is not "disproportionate." This statement is demonstrably false.

21.  This move is particularly discriminatory against women because women are already at a significant pension disadvantage relative to men, both in private and state pensions. These women have lower state pension entitlements and earned much less in their working lives while often having little chance to accrue much private pension.

22.  Government's own estimates show that women in their mid to late-fifties have state pension entitlements on average £40 a week less than men.

23.  The Government's Wealth and Assets Study showed that over 40% of women in this age group have no private pension wealth at all (compared with 20% of men) leaving women far more dependant on just the state pension than men. Not receiving this leaves them without alternative support, especially as the Pension Credit is being taken away as well.

24.  Even those who do have private pension entitlements have far less than men. Median pension wealth for women age 56 is £9,100 while for men aged 56 it is £52,800. This cohort of women earned less than men during their working lives, because of gender discrimination many years ago, interrupted work careers due to child-raising and part-time working. They were often barred from joining private pension schemes before legislative changes in the 1990s.

25.  Most of those worst affected are not earning enough to be able to save thousands of pounds to replace their lost state pension. Many are unwell and have already retired.

26.  Many cannot rely on their partner either, because nearly 40% of these women are single at pension age.

27.  The Government urges people to plan carefully for their retirement. Women who did just this have found their plans in ruins due to the unreasonably short notice.

28.  Saga is calling for the Government to reconsider this timetable. In our recent survey of over 12,000 over 50s, 74% said they believe these plans are not the right way to cut public spending and should be reconsidered.

29.  There is a range of alternative options:

(a)  First choice by far: Maintain the existing pension age timetable and then accelerate the state pension age increase for men and women from 2020 to reach 66 by April 2021.

(b)  Possible compromise: Limit rises to no more than one year within ten years of pension age.

(c)  At the very least: Maintain eligibility age for Pension Credit at the old timetable, to help the most vulnerable women (and men) cope without their state pension.

30.  The introduction of a £140 a week flat-rate state pension, joining together Basic and Second State Pensions, would at least mitigate some of the unfairness faced by women in the current state pension system. The Pensions Bill proposals are clearly discriminatory, penalising women much more than men. One cohort of women is bearing the brunt of state pension cost savings. Of the total savings, women lose 54% - well over half. A fairer timetable is needed, especially as women receive much lower state pensions than men. These changes seem to be designed by men who do not understand how these women's lives have gone.

Those affected have turned to me for help. I do hope the Government will listen to my representations on their behalf.

February 2011

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Prepared 26 April 2011