Fidelity – Broadly Hits the Right Note but Questions Remain for Poorer People

Fidelity International broadly supports John Cridland’s recommendations which provide a clear timeline for State Pension Age rises and scraps the costly triple lock. Fidelity does, however, highlight that the inability of the less wealthy or ill to get their State Pension early must be addressed by expanding auto-enrolment’s coverage to raise this group’s private pension savings. Furthermore, over a third of one’s life in retirement is still very generous and careful thought needs to be given to how this can be supported with an ever decreasing worker base.

Maike Currie, investment director for Personal Investing at Fidelity International said:

“When the State Pension was introduced in 1908, we were not expected to live much beyond the age of 50* yet today’s average life expectancy is firmly in the eighties. The population is growing, ageing and living for longer. John Cridland has highlighted a number of issues in his report, most notably the need to keep increasing the state pension age and the ending of the triple-lock guarantee.”

Cridland stresses the need for intergenerational fairness given that the workforce of tomorrow will be paying for the pensions of tomorrow’s retirees. The report highlights the plight of Generation X – those born between 1966 and 1979 who are bookended between the so-called Baby boomer generation and the millennials. Unlike the boomers, this ‘squeezed’ generation neither benefits from generous final salary schemes nor has the luxury of time to  build up any significant pension savings via auto-enrolment like the millennials.  They need , therefore, to be supported through their options and we welcome  the idea of the mid-life MoT which will be a useful way of helping people understand what retirement and later-life working look like.

Cridland’s nod to the self-employed and women, is  also a welcome step in the right direction. While those working for themselves are likely to have similar levels of median State Pension income, they are less likely to have private pension savings. Many have more property wealth on average, but this does not compensate for the lack of private pension savings.

Women have lower pension outcomes due to the disadvantage they face in the labour market during their working lives, such as lower paid work or employment breaks to take care of children or elderly relatives. The idea is floated of adopting the Swiss model of sharing pension saving on a voluntary basis whereby couples could be given the option to combine their private pension savings into a joint pension pot. In theory the idea is interesting and worth exploring, although the practicalities may be challenging.

Sensibly, Cridland has been keen to avoid a repeat of the WASPI (Women Against State Pension Inequality) protest by recommending that future rises should take place only once a decade and be notified ten years in advance.

Ultimately, the report’s approach to State Pension Age rises set out a clear pathway as to when future generations should expect to retire. If you are around the age of 25, you can expect to retire at 70, if you’re 35 then it will likely be 69 and if you’re 45 then it’s going to be 68. This effectively gives the nation a clear expectation of where the State Pension Age is going for decades to come.

Richard Parkin, Head of Pensions Policy at Fidelity International said:

“Overall, Cridland’s recommendations have hit the right note. While the triple lock was a useful policy for lifting pensioner incomes from a very low base, it seems fiscally unsustainable and the step change in incomes delivered by the New State Pension has made its purpose less clear.

The proposal to link with earnings means pensions will stay pegged to the national standard of living but this does leave those on fixed incomes exposed to price rises and perhaps less able to deal with them as they have less disposable income and more spending on essentials.

There are, however, two things that jump out as not being fully addressed. 

Firstly, while the commitment to individuals spending a year in retirement for every two years worked introduces an element of intergenerational fairness, it still means that the working population will bear a heavier burden than their predecessors in supporting the State Pension due to the dependency ratio – the ratio of workers to pensioners – falling thanks to lower birth rates. Perhaps controversially, limiting immigration will only exacerbate this problem as it will reduce the number of workers with little impact on the numbers in retirement.

Secondly, if we aren’t going to allow the less wealthy or those in ill health to access their State Pension early then we do need to ensure that automatic enrolment is expanded to cover these people. While this may not generate a lot of extra income, it can provide some bridging income between when they have to stop work and when the State Pension becomes payable.

The current rules around automatic enrolment limit access for those on low earnings but also limit contributions for those that are enrolled by excluding the first £6,000 or so of earnings. This means that somebody on £10,000 salary will only get £330 a year of contributions rather than the £800 that a 8% contribution rate should deliver. Fidelity is recommending that as far as possible, the earnings threshold and lower earnings offset under automatic enrolment should be reduced or removed to counter this.”

*ONS figures https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/englishlifetablesno17/2015-09-01