The Pensions Policy Institute has been at the forefront of an ever-changing pensions landscape since its creation 20 years ago, reveals Andrew Holt.
It is 20 years since the Pensions Policy Institute (PPI) was formed, making this an opportune moment to assess the important work the organisation has undertaken.
Much has happened in that time. The analysis undertaken by PPI has become an important part of the pensions policy discussion and indicates just how much that landscape has changed over the past two decades.
Looking back to 2001, the organisation was the brainchild of Tom Ross and his fellow members of the Pension Provision Group. The group established the PPI to undertake independent research, analysis and comment on pensions and other retirement issues.
Since then, charting the developments over those 20 years highlights the challenging pensions environment and the PPI’s impressive response on each testing turn.
For example, since its inception the PPI has published 130 major reports and 125 briefing notes. “We have responded annually to government, regulator and industry consultations and presented evidence to Parliamentary committees,” says PPI director Chris Curry.
“We have worked hard from the start to be a trusted voice in the pensions debate, relying not just on the quality and independence of our research, but also making sure that research is seen by policy makers and presented clearly,” Curry adds. Looking at the events of the past 20 years, one key moment early on was in 2003, with the publication of the PPI’s Guide to State Pension Reform, which was a roadmap with a radical agenda.
The context of this was the pressure that had been building for the government to recognise that reforming state pensions is the highest priority in tackling the major retirement funding issues facing the country.
Setting out the challenges, Alison O’Connell, director of the PPI at the time, said: “Reforming state pensions is the most important step in solving the growing discontent with our pensions system. State pension benefits are the only income the poorest sector of the population will have to live on in retirement. But the state system is widely criticised for being complex and inadequate.
“It is widely thought that the policies underlying the system are unsustainable. And private pensions only stand a chance of flourishing if they can be placed on a secure foundation,” she added.
This came after the creation of the Pensions Commission, announced in a pensions green paper at the end of 2002, to analyse the pensions system against the changing socioeconomic and demographic background and make recommendations for reform.
What the commission did was publish several reports: its rst was published in October 2004, setting out a detailed anal- ysis of the UK pensions system, followed by a second, published in November 2005, presenting its conclusions on the likely evolution of the UK pension system if policy remained unchanged, along with the commission’s recommendations for a new policy direction.
A final statement was published on in April 2006, detailing its response to specific issues which had arisen in the debate on pension reform since publication of the second report. The PPI spent much time analysing the minutiae of the com- mission’s proposals.
The issue of the state pension has there- fore been a regular source of thinking and debate, with pension ages undergoing radical changes since April 2010. These changes saw the state pension age rise to 65 for women between 2010 and 2018, and then to 66, 67 and 68 for men and women. Plans are afoot to change state pension ages further.
A 2018 PPI report revealed the importance of the state pension: finding that while levels and sources of income vary across the older population, the state pen- sion is an important part of retirement income for all pensioners except the lucky few with the highest retirement incomes. For the poorest pensioners, £3 in every £4 (78%) of their income is paid by the state, rising to almost £9 in every £10 (86%) when state benefits are included, highlighted the report.
Another big and important issue was that of automatic enrolment, which was phased in from 2012, starting with the largest UK employers with the aim that all eligible workers should have been automatically enrolled in their employer’s workplace pension scheme by February 2018. A 2017 automatic enrollment review made recommendations on the age of eligibility and earnings band.
“Automatic enrolment has been successful in encouraging mass participation in pension saving. The number of active pension savers – in the public and private sector – has grown from around 11 million in 2012 to around 19 million in 2018,” the PPI noted in a briefing note published in 2020. “It has also been successful in enrolling the group it was specifically targeting: employed lower earners.”
Indeed, of all income groups, those earning between £10,000 and £20,000 experienced the greatest rise in participation between 2012 and 2018, from 34% to 81%, a 142% increase.
Free to choose
In 2014, the PPI published the briefing note Freedom and Choice in Pensions: comparing international retirement systems and the role of annuitisation.
The note needs to be seen in context of the 2014 budget, when the then chancellor George Osborne announced radical changes to how de ned contribution (DC) pension savings could be accessed at retirement.
Traditionally it meant that around three quarters of those reaching retirement with DC pension savings use them to buy an annuity. Though, as an alternative to annuities, those over minimum pension age could invest their pot in an income drawdown product, but there were restrictions on how much could be drawn down in a given year.
The briefing note found that, while the demand for annuities was expected to fall in the short-term as a result of the new freedoms and flexibilities being announced, improved annuity products may still prove to be an attractive retirement income solution for some groups in the future.
The PPI’s review of international retirement systems highlighted several factors that affect the demand for annuities across different countries, providing relevance to the market in the UK.
These include underlying cultural attitudes and the appetite for a secure and guaranteed source of income in retirement, the structure, variety and perceived value of other retirement income products on offer in the market; the timing and framing of the decisions about how to allocate pension savings, and the perceived attractiveness of the annuity rates on offer.
Public pension reform
In 2015 the government introduced reformed pension schemes across all the main public service workforces. The reforms included a policy of transitional protection that meant members closest to their normal pension age stayed in their legacy schemes.
The Court of Appeal later found this transitional protection to be discriminatory against younger members in the judicial and firefighters’ pension schemes. The government accepted that the judgment had implications for the other schemes including the police pension scheme, as they contained similar transitional arrangements.
The Treasury then ran a public consultation during the summer of 2020 to gather stakeholder views on the government’s two final policy proposals – a deferred choice underpin or an immediate choice exercise, to which in February this year the government went for the deferred choice underpin option.
Going on the front during the consultation, the PPI explored the impact of revamping the pensions tax system –emphasising that a at tax relief system could see the proportion of tax relief enjoyed by basic rate taxpayers increase to 42% from 26%.
Backing up this call was a revealing report published with the ABI which pointed out that around 50% of tax relief on DC contributions is associated with individuals earning more than £60,000 a year, meaning that half the value of the tax relief is claimed by the 15% with the highest incomes. It found that, for the same cost, it would be possible to o er a higher benefit to basic rate taxpayers through a at rate of relief.
Not all issues the PPI has had to deal with have been pensions specific. Though the rise of the issue of the modern age: ESG, poses specific challenges for pensions and the PPI.
Lauren Wilkinson, a senior policy researcher at the PPI, says: “Following changes in regulation and an increasing recognition of the financially-material nature of environmental, social and governance risks, we are seeing more schemes engaging with such strategies than ever before and to a greater extent. “However, there is still work to be done before we reach a point where all schemes are engaging in a meaningful way. For some, this may mean more support and guidance.”
Looking back on massive change in the pensions industry and the PPI’s role in it, Curry comments: “In some ways the land- scape today looks much better than when the PPI started. The pensions position of women has improved significantly, more people are covered and receive a better pension from the state, and more people than ever before are covered by workplace pensions. “But,” adds Curry, “there is further to go.”
Looking forward to the future challenges, Curry notes: “While the last 20 years has been characterised by constant change, it is likely this will continue over the next 20 years.
“Pension contributions are not high enough for many people,” he added. “There is still significant inequalities among different groups. Managing money through life is becoming increasingly complex and the impact of Covid-19 will put additional burdens on everyone. “I am sure,” concluded Curry, “the next 20 years will be as busy for the PPI as have been the last 20.”