What's the issue?

British workers have traditionally relied on occupational pension funds in addition to the state pension to provide their retirement income. These workplace funds are becoming less able to provide income security for all, let alone promote economic growth and financial stability. Reforming the pension system requires an increase in the state pension as well as addressing a number of problems in occupational pensions.

Analysis

In the UK, occupational pension funds have played an important part in the overall provision of retirement income, for higher earners in particular. In many other European countries, recent reforms have been guided by the aspiration of reducing the cost of Pay As You Go state pension benefits, which are financed by current taxation and social insurance contributions. However, in the UK, where state pension benefits are already comparatively low, the focus has been on expanding the coverage of occupational funds, which are pre-funded through contributions accumulated over their working lives, paid for by workers and their employers. This was achieved by the last Labour government for most workers through the introduction of automatic enrolment of workers to an occupational scheme to which, unless they opt out, they contribute a set percentage of their earnings and to which their employers must then also make a minimum contribution. At the same time, the government also set up NEST, a government-administered pension fund for employees of smaller companies who do not have access to a workplace scheme.

There are several so-called ‘technical problems’ with the new system. Not all workers will accrue benefits. They might work multiple jobs, all below the threshold for employer contributions, or work in precarious employment that does not provide the stability required for pension saving. Current pension schemes are de facto individual savings accounts, with tax benefits and employers’ contributions, but it is nonetheless difficult to pull separate pots together when moving jobs.

This approach also may not be in the interest of many workers, particularly the low-paid, because it locks money into a pension, unlike savings held in a deposit account, or ISA, to which access is retained at any age in the case of unanticipated financial need.