NAO calls for more joined-up thinking on retirement income policy

Too many Government departments involved – some policies contradictory

Improving later life incomes will benefit everyone and increase long-term growth

by Dr. Ros Altmann

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No cohesive responsibility for improving later life incomes: The National Audit Office has just released its review of Government support for retirement incomes. It has rightly identified that there is no overall, cohesive responsibility for this vital area of national interest.

Seventeen Departments or public bodies involved!: Both the Treasury and the Department for Work and Pensions share responsibility for different elements of retirement income, but there are also 17 other Government departments or public bodies involved.

Some policies contradictory: Responsibility for employers of older workers rests with the Department for Business, social care is under the direction of both the Department for Communities and Local Government and the Department of Health, fuel poverty falls under the Department of Energy and Climate Change and so on. In some cases, policies pursued by one area of Government can actually undermine the success of initiatives from other parts of the system.

Very low state pension requires good top-up private income: The UK has one of the lowest state pensions in the developed world, so it is important to ensure good additional private income in later life. However, by relying heavily on means-testing pensioner support, the state system undermines incentives to save, because those who save could end up losing retirement benefits that others who did not bother saving will receive.

Improving later life income is an issue of national importance: If increasing numbers of older people have very low incomes, UK long-term growth will decline as the spending power of the population falls.

Rethinking retirement to improve later life income: By encouraging longer working lives, people will be able to achieve higher later life incomes and facilitating part-time work can change the whole concept of retirement itself. Retirement should be a ‘process’ not an ‘event’, with workers cutting back gradually, rather than suddenly stopping altogether. Sudden and total retirement is a waste of resources, stopping people from earning more money that could improve their own lives and also benefit the economy. As people are living longer and healthier lives, it makes much more sense to consider reducing working time, scaling back, but still staying engaged in the labour force. Initiatives to encourage later working need to be managed coherently.

Centralised responsibility for planning to improve later life incomes required: Despite several much-needed and long overdue reforms being introduced in recent years, there is inadequate cohesion and vision. An over-arching structure needs to be articulated and managed to have maximum effect.

Many parts of policy are sensible, but fail to provide adequate outcomes: As an example, the removal of the Default Retirement Age sends a strong signal to employers and employees that longer working lives should be embraced, but intiatives for later life training and job support are lacking.

State pension is being reformed but also reduced, but auto-enrolment not enough to offset future income shortfalls: The radical reforms to the state pension will help reduce the private savings disincentives entailed in mass means-testing, however this reform will result in an even lower state pension for most people in future. This means more is required of private saving but policy in this area is inadequate. For example, just introducing auto-enrolment into workplace pensions, designed to improve private pensions, will not necessarily increase pension outcomes. The policy of auto-enrolment has failed to take account of the crucial area of annuities and conversion of the accumulated pension fund into an optimal stream of later life income. Bank of England policies have undermined private pension income as annuity rates have fallen sharply.

Inadequate provision for financial planning: Private savings and planning later life income are complex subjects which most people are not equipped to manage on their own. More attention should be paid to helping people access advice and information to be able to form a more realistic view of their later life income prospects. So far, the Money Advice Service has not reached most of the population. Incentivising financial education in the workplace would be an example of a policy initiative that can cut across many areas of retirement income planning.

No initiatives to incentivise saving for social care: Savings policy has also failed to consider the financial burden of social care provision. Later life income is about more than just pensions, since pension saving cannot cover care costs. As the Government is reforming the social care system, it needs to also factor in the requirements of savings policy in this area. There are no savings incentives for social care and pensions cannot cover those costs. The Treasury and Department for Work and Pensions, together with the Department for Communities and Local Government and Department of Health would all benefit if more money was set aside for social care by individuals and families.

More work needed to integrate and plan pensioner support policies: As an independent adviser to the NAO when it originally established its review, I suggested that there is an urgent need to ensure the right hand and left hand of government policy can work together. I hope this report will pave the way for more joined-up policymaking in future.