The economy could undermine the Government’s new auto-enrolment pensions policy, forcing policy makers to look at radical new ideas such as low cost public loans, additional behavioural “nudges” and even compulsion, according to a new report from leading think tank the Social Market Foundation.
Jam Tomorrow: the next 20 years of savings policy draws on a novel research method known as scenario planning to map out the challenges facing the UK population and economy in 2032 under a variety of different possible situations. With the backdrop of an ageing population, the analysis looks at how policy might need to respond to the success or failure of auto-enrolment and to different economic prospects.
Over the next two decades, the SMF report concludes, the state will not be able to rely on individuals to save adequately for themselves, but nor will it be able to afford to support families and retirees sufficiently through the welfare system, as it has in the past. This will force governments increasingly to intervene in people’s lives, potentially compelling people to save into pensions and making claims on future income by offering new income contingent loans to support individuals at pinch-points in their life, including for student loans, long-term care and childcare costs.
“The unprecedented long-term pressure on the public finances will mean that governments will not be able to afford the consequences of the current chronic under-saving of UK households,” said Dr Nigel Keohane, SMF Deputy Director and author of Jam Tomorrow.
“Instead they will increasingly have to nudge, prod and regulate people to manage their personal income and wealth in ways that achieve beneficial outcomes for them and for society as a whole.
“That means considering policies like compulsory pensions saving, low-risk pension products and income-contingent loans for childcare”.
The scenario planning exercises found that:
- If auto-enrolment does not substantially boost levels of engagement with pension saving, perhaps because of low earnings growth due to chronic economic weakness, compulsion may emerge as the next logical step for savings policy.
- If auto-enrolment diverts family resources from building accessible precautionary savings, or from paying down debts, it could undermine the ability of households to cope with short-term economic shocks such as unemployment.
- Individuals are increasingly bearing financial risk in their provision for retirement. This is intimidating and may be causing many to disengage from savings entirely. The kind of risk-sharing pension promoted by Pensions Minister Steve Webb may therefore be necessary to mitigate the risk individuals are exposed to.
- Current pension tax relief will become increasingly expensive for the state as the number of higher rate taxpayers grows rapidly over the coming years.
Notes to Editors
- The SMF analysis considers three scenarios based on considering a number of different factors, including the speed and rate of economic recovery, the speed of deleveraging and the impact of the new auto-enrolment policy. The three scenarios were:
- a rapid return to growth but with widespread income inequalities;
- the impact of a decade of slow growth combined with high levels of opt-outs of pension auto-enrolment;
- a high level of take up of private pensions combined with low levels of engagement with savings decisions.
- The Government’s auto-enrolment policy for pensions went live in October 2012. Under this policy, employers have to offer a workplace pension to employees and employees are automatically opted into the scheme, although they can subsequently decide to ‘opt out’.
- The scenario planning exercises were conducted with an expert panel.
- Jam Tomorrow: the next 20 years of savings policy is sponsored by Aviva. It will form the basis of a discussion on Thursday 22 November at the Social Market Foundation with Lord John Hutton, Paul Johnson, Nigel Keohane and Jeff Prestridge. For more information, please see here.
- The Social Market Foundation (SMF) is a leading UK think tank, recently named UK Think Tank of The Year and Economic and Financial Think Tank of the Year
- The SMF develops innovative ideas across a broad range of economic and social policy, champions policy ideas which marry markets with social justice and takes a pro-market rather than free-market approach. smf.jynk.net