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New pensions consensus needs further changes to deliver adequate retirement incomes, says TUC
The Pensions Commission has given the UK the opportunity to build a new progressive pensions consensus, but contribution levels need to increase and structures need to work more in the interest of consumers so that they receive adequate retirement outcomes, according to a new TUC report published today (Wednesday).
The TUC Touchstone Extra pamphlet Third Time Lucky argues that there have been three periods of pensions consensus since the second world war. The first, shaped by William Beveridge and Barbara Castle, provided a decent state pension topped up by either employer or the state with an earnings related element.
The second, shaped by Mrs Thatcher but continued by the early years of Labour after 1997, transferred responsibility to individuals and undermined the collective provision of pensions.
The Pensions Commission, set up in 2002 when the failure of this second approach became obvious, provides the basis for a new progressive consensus based on a flat rate state pension and an auto-enrolled workplace pension on top.
But although the approach set out by the Pensions Commission gets the architecture right, the report's authors Craig Berry and Nigel Stanley identify several problems that still need to be tackled:
The 'single tier' state pension is set too low as it will reduce the share of GDP going to state pensions over time, compared to the current system. It is effectively a spending cut paid for by future generations.
Minimum contribution rates - no more than 6.8 per cent, rather than the 8 per cent usually quoted - are not enough to provide a decent retirement income. Over time need to both increase and start at the first pound of pay.
There is market failure across pensions provision as suppliers are smarter and more powerful than the employers now choosing auto-enrolment pensions, and there is no guaranteed worker voice. Trust-based provision, with strong governance and the benefits of scale, is better placed to make markets work and provide a good deal for employees.
Improving defined contribution (DC), rather than deregulating defined benefit (DB) pensions, should be the focus of the government's 'defined ambition' agenda. This should include promoting collective DC, because schemes in which people bear all the risks individually are economically inefficient. There also needs to be vital reforms to minimum contributions, governance arrangements and annuity markets.
Commenting on the pamphlet TUC General Secretary Frances O'Grady said: 'The enduring political consensus around auto-enrolment and state pension reform gives us a great starting point for a modern pension system that is fit for purpose.
'But even the best structure won't work unless it it provides people with an adequate income after they have retired.
'Of course change needs to be gradual and consensus maintained as much as possible, but that is no reason for not setting our our defined ambition - better pensions for all.'
NOTES TO EDITORS:
- Third Time Lucky can be downloaded under embargo at www.tuc.org.uk/tucfiles/594/Third_Time_Lucky.pdf
- The TUC's campaign plan can be downloaded from www.tuc.org.uk/campaignplan
- All TUC press releases can be found at www.tuc.org.uk
- Follow the TUC on Twitter: @tucnews
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