PPI emphasises need for UK pensions framework ahead of methodology report

The Pensions Policy Institute (PPI) has argued that now is the right time to introduce a long-term UK specific pensions framework, confirming that a methodology report for the PPI framework will be published at the end of the year.

A briefing paper from the PPI explained that the framework, initially announced in May and being sponsored by Aviva, would aim to promote “consistent, informed, evidence-based policy discussion and decision making that can improve outcomes in later life”.

It will act as a tool to help measure and explain differences in financial security and experiences that people have in later life, and what might happen if new policies are introduced.

Analysing underlying objectives of adequacy, sustainability and fairness against a series of indicators and measurements, it will aim to examine trends and differences in system outcomes from the perspectives of employers, individuals, the state, and financial service providers.

The first report into how the system is working, how far, and why is expected in 2022, according to the PPI, with analysis to be refreshed annually following this.

The PPI emphasised that now was the right time for a dedicated pensions framework, arguing that it has "never been more important to understand the uncertainty that lies ahead".

In particular, the PPI suggested that pensions policy needs to be regularly assessed against policy objectives, noting that unprecedented changes have been made to the UK pension system over the past twenty years, and that it will be "crucially important" to understand how policy outcomes relate to each other over time.

In addition to this, it warned that the trend towards increased dependency on private pensions could be set to reverse as people reach retirement without defined benefit (DB) savings, with policy decisions likely to impact age cohorts differently.

The long-term savings position of generation X, for instance, was highlighted as a “particular concern”, as they are less likely to have the DB provision seen amongst baby boomers, and less time to remedy this shortfall through defined contribution savings as millennials.

PPI also warned that individual risk is increasing, as systemic shifts have seen retirement risk transferred from employers to individuals amid the closure of many DB schemes.

It stated: “The need for better informed, consistent, transparent and coordinated long-term policy making remains a critical issue. Moves towards greater long-term stability in some areas such as the state pension have been offset by continued changes in others such as tax treatment of pensions.

“This is important because consistency and coordination in policy making can support confidence that people need to plan for the future.

"Addressing the myriad of changes discussed and the speed at which they are taking place requires informed, evidence-based and coordinated policy debate.

“A new UK pensions framework can make significant long and short-term contributions towards it.”

The PPI suggested that the framework would also fill an important research gap, as despite developments in policy research, no single resource is dedicated to building comprehensive, long-term analysis of trends and changes in the UK pension system.

“For this reason, it remains challenging to establish a clear and consistent picture of the extent to which policies are shaping long-term outcomes beyond their immediate or intended goals, who they are working for, and why,” it stated.

PPI has already identified a number of key challenges it expects to face going forwards, including identifying where measurements should be examined against targets such as replacement rates in order to inform indicator tests, assessing the relative impact of side-effects and interactions, and presenting normative or subjective concepts such as fairness in an objective way.

It concluded: “The study of pensions is an inexact science, and the search for a perfect or perfectly self-regulating pension system is an impossible undertaking.

“The framework is expected to raise as many questions as it answers. In doing so, however, the overarching aim remains not to answer every one, but instead to provide facts and evidence to support the policy debate that is crucial to improving retirement for generations in the future.

“These framework objectives are synonymous with those at the heart of the PPI’s mission when it was founded twenty years ago. We welcome input to the development of the framework and invite anyone with an interest in this research to get in touch with the author."

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