Ten years on from the launch of auto-enrolment and two decades from the Pensions Commission that shaped it, the world of workplace pensions has been transformed.
Reducing means testing, raising the state pension age and nudging people into financial services contracts without a signature were all big ticket elements of the reforms. Ensuring there was consensus for these fundamental changes was, says Lord Turner, crucial if the policy initiative was to succeed.
Building that consensus around how to address the nation’s retirement savings crisis involved setting out the scale of the problem first, and then proposing the solutions with the second report.
Turner says understanding the political cycle was key to achieving consensus and getting the commission’s proposals adopted. The first Pension Commission report was delivered at the end of 2004, outlining the state of the challenge faced by millions of non-saving Britons.
Turner says: “We very deliberately tried to get everybody agreed on what the situation was and what would happen if there was not a change. And in a straight bit of calculation, we decided to get it out before the General Election, which everyone knew was going to be in 2005, and then launch our actual proposals after the General Election. Because if you want to get cross-party support for something, the worst possible time to do it is in the last six months before a General Election, because in that six months politicians are at their most short termist. They are focusing on what attack lines to use versus the other side.”
Turner and his team, which included Baroness Jeannie Drake and senior economist the late Professor John Hills, delivered concrete proposals in the Pension Commission’s second report in 2005, early in the new parliament when the Government’s political capital was high.
“There were two key elements to what we were saying. One was the state pension, which we believed had to be at a later age, but more generous. The second element was how it linked to the private sector. We needed to put a stop to the endless growth of means testing. It created a complication for people to sell private pensions because they would say ‘I sell you this private pension, but there’s a fair chance that
quite a bit of it is going to be taken away in means testing’.”
So was there a concern in government that by making the nudge that was central to auto enrolment, it might be culpable for misselling?
“Yes. If you left the situation as it was, the danger was that you’ve auto enrolled some people into something where part of what you’ve auto enrolled them into disappears in a means-tested clawback. And that would have been a very difficult thing to do. You’re using the power of nudge, but you’re not clearly telling people that this might not be a good deal for them if they are towards the bottom end of the income distribution.”
Turner hoped for a more generous state pension, but while it is more generous for some, it is less for others, particularly those who had been contracted in for all or most of their working life. Based on 2014 figures, contracted-out workers in their fifties will be about £40 a week better off under the new system as they will have enough time to catch up with contracted-in workers and get full state pension. Contracted-in workers of the same age on the other hand, who by definition include all those with no private provision, can be £50 or more a week worse off as a result of the switch to the single tier state pension. Turner points out that the triple lock has changed the arithmetic considerably since his review recommendations.
“All we said was that we should stop linking the state pension to prices, which was going to degrade it relentlessly relative to average earnings. And we should link it to average earnings. The triple lock has made it even more generous.
Looking back, he recalls his worries about keeping the politicians on board – a challenge that had required a lot of lobbying behind the scenes.
“At the time we announced our reforms, which was in November 2005, we were the first major commission or politician to say we’re going to have to increase the state pension age. Up until that date there is barely a single speech by any politician saying that we can increase the state pension age. We announced it at 11:00 in the morning and by the evening news, all major political parties had said, yes, we’ve got to increase the state pension age. But that didn’t just happen in those six hours – we had spent the previous six months making sure that when we came out there was going to be broad support.”
The proposal was met with a largely fatalistic response from the media and the public, something Turner puts down to the hard work in ensuring the policy reflected the views of people the length and breadth of the country.
The commission conducted in-depth market research with big groups of members of the public in four cities around the UK.
“We had them for six hours and we presented the facts – here’s what’s happening to people’s life expectancy, here’s what’s happening to the number of people over 65, here’s what’s happening to private savings, here’s how defined benefit schemes are disappearing, this is the trend of what people’s income is going to be in retirement in 20 years’ time if we don’t do anything else.
“And we asked whether they wanted to pay higher taxes through National Insurance to have a higher state pension, or did they want to keep it linked to prices, and did they want to have the state pension age go up? At the beginning of the day they voted for a mathematically impossible combination. Nobody wanted National Insurance to go up. Nobody wanted the state pension age to go up. And everybody wanted the state pension linked to average earnings, not prices. Then we did a series of presentations and had roundtable discussions and took a vote at the end of the day.
“And we had a coherent result, which is that people could see there was going to have to be a combination of actions and they were no longer collectively asking for the mathematically impossible.
“Around the world this citizens’ assembly approach is used. The French used it on climate change. The Irish used it on abortion and gay rights. People feel they’ve been asked to engage in something which is serious. They end up understanding the need to compromise and for solutions to be based on fact.
“Our politics of the House of Commons and tweets and the 24 hour news cycle produces much less ability to focus on long term challenges than if you get 100 randomly-selected citizens, get them into a room and create an environment where you’re asking them to engage with the facts,” says Turner.
The biggest behavioural innovation of the Turner review is the ‘nudge’ that automatically enrolled workers into a financial services product contract without a signature, but giving them the chance to opt out. The UK’s auto-enrolment policy has become the poster boy for nudge theory, the behavioural strategy outlined by Richard Thaler and Cass Sunstein, whose book Nudge: Improving Decisions About Health, Wealth and Happiness, was published in 2008. So how did Turner’s team come to put nudge at the centre of its policy?
“We started looking at auto enrolment patterns and there was data on auto enrolment in 401Ks in the US, which is their equivalent of a defined contribution scheme.
“[Co-review head] John Hills, who died tragically last year in the middle of the Covid crisis, knew his economic theory. We started pulling out the basic literature. Richard Thaler and others at Chicago were beginning to write about it and it caught our attention. We looked into it and fairly quickly we said, well, this is almost certainly the answer, isn’t it?”
Turner is caustic about the way George Osborne’s pension freedoms were introduced. “It’s a major issue. Our work was careful, deliberative, fact based. And frankly, George Osborne’s introduction of wide pension freedoms at retirement was in a made up in the month before a Budget to give him a big splash. It was absolutely an example of not researched, not thought through stuff,” he says.
So does Turner think pension freedoms are a bad thing? “They will be a very bad thing for some people. We could have looked at a variety of options like having to annuitise to give yourself at least an income of X and beyond that, do what you like.
“Or you could give freedom to do it something at 75 without an annuity, but you have to buy a deferred annuity which kicks in at 85. This covers the tail risk, which means that you’re not going to be in absolute poverty when you’re 85 or 90.
“I think the tragedy was to go into pension freedoms without really thinking through the totality of those options. This was bad policy making.”
So does Turner think there is an argument for an at-retirement pension commission? “That could be a good way to really focus on it and think about what we are encouraging people to do. And maybe that ought to include a nudge element rather than a voluntary versus compulsion element,” he says.
One key element of auto-enrolment was the introduction of a new state-sponsored pension provider with a public service duty to take the staff of any employer, regardless of size or contribution rate. So how much resistance did Turner and his team get from the industry at the establishment from taxpayers’ cash of a competitor in the form of the National Employment Savings Trust (Nest). Turner said the existing pension providers understood the reality that a catch-all provider was needed for those savers that were uneconomical for the industry to serve.
“I think in retrospect we should have been tougher with the industry. The industry was not resistant to Nest – it was resistant to Nest being able to take limitless transfers and contributions from richer people.”
How concerned was Turner that the tech challenge of enrolling millions of people into schemes could turn into an administrative nightmare?
“Firstly, this is not as complex as say legacy scheme migration, where you have schemes from the eighties or nineties which may have originally been on paper, or on a badly coded system.”
And did Turner get a sense of concern at the Treasury at the increase in tax relief that would be given as a result of the democratisation of pension saving? Turner points out that the decline in defined benefit schemes had seen a reduction in tax relief paid.
“The long term trend would have been down if we hadn’t done auto-enrolment. We didn’t have Treasury saying whoopee, private pensions are dying and in 25 years we won’t have any pension tax relief. They were not taking that point of view,” he says.
Turner’s biggest concern over the review was the fact that the self-employed were not brought in.
He says: “Auto enrolment really doesn’t work unless you’re on some category of monthly pay. This is unfinished business today, and maybe it’s just intractable. If you are self-employed, maybe you just have to accept that there are limits to how much the state can help you.”
And was there pressure from government for auto-enrolment funds to invest in UK infrastructure, as has been the case in some other countries.
“It is a tricky issue to bring in. On the one hand, infrastructure is a very logical pension asset. So if we have an offshore wind project with a contract for difference, which guarantees the price for a bit of
the offtake, and if gilts are delivering 0 to 1 per cent real, for absolute certainty, a well-structured infrastructure project giving 2.5 to 4 per cent real return with very little risk can be attractive.”
Turner’s main focus now is climate change. He is chair of the Energy Transitions Commission, a global coalition of power and industrial companies, investors, environmental NGOs and experts.
So what does he make of the raft of 2050 or sooner net zero portfolio pledges made by the industry, and of the challenge of meeting 50 per cent reductions by 2030?
“That’s quite a reasonable thing for the majority of their investors, so that when they retire in 2050, they have a reasonable monetary return, but also we’ve at least mitigated the rise in temperature. And the good news is you can deliver net zero by 2050. It is not all that difficult and should not involve a sacrifice of return.
“Particularly if someone’s fund is a long way away from retirement, equity-like investments in the technologies which are likely to develop in the future – hydrogen batteries and the like, will give a fair shot of that doing at least as well as a high carbon portfolio over the next 10 years,” he says.