By Dale Critchley, Workplace Policy Manager, Aviva
However, even when there is not an explicit focus on pension saving, public policy clearly has a big impact on future living standards for us all.
The complexity of the UK pension system and the interdependencies between the different moving parts makes setting policy difficult. The phrase ‘unintended consequence’ is often used post-regulation to describe the complexity it creates, with the new system sometimes resembling a painting by the artist Jackson Pollock.
Aviva is working with the Pensions Policy Institute (PPI) to try to make sense of this complex system. The findings were published in the PPI’s UK Pensions Framework Systemwide Analysis Report 2022, in November.
The first step, as with many issues, is to simplify what is being measured. The PPI decided on three strategic objectives that define the success of a pension system. These are adequacy, sustainability, and fairness. This recognises that a pension system should provide an adequate level of income, in a way that is sustainable over the long-term and is fair to all current and future stakeholders. Underlying these objectives are the different policy areas which combine to drive the present position of each strategic outcome.
The report is impressively comprehensive, having examined 41 different policy areas in the level of detail only the PPI can achieve. Anyone looking for data on the UK pension system should make the technical appendices that accompany the report a first stop for inspiration.
The real beauty of the report is that it is like a work of art, in that the analysis is presented in such a way that, while at first it seems complex, it then manages to draw the reader in. At the centre of the pension policy ‘wheel’ are those three strategic objectives, with the policy levers which determine each outcome radiating outward. The policy levers, like the outcomes, have been colour coded so it is easy to see the areas that are contributing most positively to each outcome.
Within and across each sector are the tensions that exist, and the need for balance if all three outcomes are to be achieved. It is probably not surprising that inadequate contributions in Defined Contribution (DC) pensions provide poor support for the adequacy outcome. While Defined Benefit (DB) accruals, mainly sitting in the public sector, provide strong support. On the opposite side of the wheel sits sustainability, where lower DC contributions provide good support for employer sustainability, while challenges around state pension and public sector provision provide slightly less support in terms of fiscal sustainability.
It is not possible for me to do justice to the report’s conclusions in just a few words. In a very simple summary, the report reveals that the UK is doing better at achieving the aim of sustainability than adequacy or fairness. Too many people have too little, and the opportunities to accrue pension saving are not distributed as equitably as they could be.
The report considers the trade-offs that might result from policy interventions, such as changes to state pension age, and how the system has transitioned from one where risks are shared or underwritten by institutions to one where individuals may need to manage the risks associated with both accumulation and decumulation.
November’s report is the first baseline of the system and will be updated at regular intervals to reflect new data. In the meantime, the PPI ‘wheel’ will be a useful tool for shaping reform. The ‘wheel’ already highlights those areas which might need greater focus, but it also has the potential to paint a picture of the future, through measuring the impact of proposed policy interventions. In that way, policy makers could see in advance the impact their changes have on the whole system, not simply to avoid unintended consequences, but to build a system that we can all stand back and admire.
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