The poor UK economy has stopped ministers taking further steps to help people save more into their pensions, a former shadow pensions minister has said.
Gregg McClymont, who held the position from October 2011 to May 2015, said economic stagnation has made it impossible for ministers to push through much-needed pension reforms, including increasing contribution levels and making the system more efficient.
The economic struggles in the UK over the past two decades have been the biggest obstacle to reform, the former Labour MP said, with real wages stagnating since the 2007-08 financial crisis.
Speaking to The i Paper at the Pensions and Lifetime Savings Association conference in Edinburgh, he said: “It’s tough to increase contributions on employers and employees when real wages have not been rising. Employers feel pressed, and certainly individuals feel pressed.”
Labour has not prioritised pension reform in recent years, largely due to these economic constraints, McClymont said.
He warned that while the UK’s auto-enrolment system was a major success, the country was falling behind nations like Australia, where pension savings are invested more efficiently, and employer contributions are significantly higher.
But he said economic pressures have made it difficult for both employers and employees to contribute more to their pensions, delaying progress.
McClymont said his top priority if he were pensions minister – a role held by Torsten Bell – would be to ensure that pension savings “work as hard as possible” for people’s retirement, stressing the importance of investing in the right assets at the right cost, ensuring savers get the “best bang for their buck”.
The Government is expected to introduce a new pensions bill in the coming months, which McClymont predicts will focus on making pension funds more efficient.
However, he acknowledged that there are limits to what can be done without a stronger economy.
He said: “The Australian defined contribution (DC) system has been pretty successful.
“The funds which individuals are invested in have significant allocations to things like infrastructure, if you work in that industry. And that’s been very popular over there.
“People like the fact that their money is invested in tangible assets in the real economy.
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“But another key lesson is that their pension funds have consolidated, meaning they are bigger, more efficient, and able to invest in significant assets at the right price.”
He also said the UK pension system makes it too difficult for people to turn their pension savings into a reliable income in retirement, something that Australia has done well.
One of the biggest challenges, he argued, is that UK pension contributions are still too low.
The current minimum auto-enrolment contribution is 8 per cent, but in practice, many people only contribute around 6 per cent due to minimum thresholds.
Many experts believe this needs to rise to 12 per cent over time.
In Australia, the mandatory contribution is already at 12 per cent, and it is entirely funded by employers.
McClymont, who is now executive director of public affairs at IFM Investors, said that while such a model is unlikely in the UK, more employer contributions would be necessary in the future.
However, given the country’s weak economy, he does not expect contribution increases in this Parliament. He suggested gradual increases of half a per cent a year in the future.
He said: “My sense is that it’s unlikely that contributions would rise now, but hopefully in this Parliament, you get a sense of where the pathway has been set.”
McClymont acknowledged that auto-enrolment was a significant step forward but argued that further progress is needed to ensure people save enough for a decent retirement.
Another problem he highlighted is the complexity of the UK’s pension system, particularly the proliferation of multiple small pension pots.
Australia has largely solved this issue by running everything through the tax office, ensuring lost pension pots are easily matched with their owners, he said.
One solution is simplifying the UK’s system – something that would make pensions easier to manage and improve outcomes for savers, McClymont said.
He also weighed in on the debate over whether the 25 per cent tax-free lump sum that retirees can withdraw from their pension pots should be reformed.
While acknowledging that a cash-strapped Government might be tempted to change the rules, he warned against it, saying: “Confidence in the system is really important, and keeping the rules as stable as possible really matters.”
He believes the current Labour leadership understands the importance of stability in pension policy but added: “We do have a Spring Statement coming up. So, I guess we’ll just have to wait and see.”
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