Everything you ever wanted to know about pensions is discussed in this episode, from what the triple lock actually is, to the difference between defined contribution and defined benefit pensions.

Most importantly, we talk about solutions, how can we ensure people have enough in retirement?

Full transcript

Mubin: Welcome to the Financial Fairness podcast with me Mubin Haq.

Pensions. We all know they’re important, we all hope to have a decent standard of living when we retire. But how can we make sure we have enough for our golden years?

From auto enrolment to pension freedoms - we’ll get the inside story on how the pension landscape has been revolutionised. We’ll discover why the triple lock is still top of the political agenda and most importantly we’ll talk solutions.

Joining me today are Felicia Odamtten from the Resolution Foundation, and founder of the Black Economist Network and Steve Webb, former Minister for Pensions in the coalition government. Steve helped bring in some of the big changes of recent years which we’ll be discussing and is now a partner at Lane Clark and Peacock.

Mubin: Felicia, Steve, thanks for joining me today. Nice to have you here in person.

Steve, I thought we'd start off with just getting a bit of background as to how we got here. When did we actually start having a state pension and what was behind it?

Steve: We have to go back over a century, just before the First World War. And a pension was if you like, an insurance against living too long. Because you know, back in the day, if you live to 75, you were doing pretty well. But if you were the unlucky one who lived to 80, or 85, you would run out of money. the danger was extreme old age would just mean poverty. So the original idea of a state pension was insurance against living too long, funnily enough, so most people actually didn't get a state pension, they didn't live long enough when it first came in.

Mubin: Or they ended up in the workhouse

Steve: Well, I mean, that's always the challenge, I think, traditionally, families would have supported elderly relatives. We had a very limited means tested - if I remember, rightly, you had to be people of good character - pre First World War. But it's only really after the Second World War, the Beveridge model and all of that, that the idea became that this should be something for everybody, that you would have a sort of state-run system of National Insurance where you pay in, and when you reach a certain age, it pays out. And really, although the state pension system was thrown up in the air in 2016, for most of the 20th century, it was that postwar model that we lived with.

Mubin: We've had quite a lot of reforms, I just thought we’d have a whistle stop tour of what they were, because you’re actually responsible for some of these, aren’t you?

Steve: Only the good ones. So I mean, I suppose the first thing to say is the original model was all about work, paid work. So, when the system was designed, it was about men, particularly and I say that deliberately, because there was a separate system for married women who was assumed on the whole wouldn't be in paid work. So, we had a model of paid work, paid National Insurance, and then a National Insurance pension when you retired. And I think one of the big changes was the recognition that people do stuff like bringing up children that we value as a society, but wasn't generating pension rights. it took till the late 1970s and Barbara Castle and the Labour government in the 1970s to introduce what we would now call National Insurance credits. So, protection for time when you're doing something we think it's important like bringing up kids caring for an elderly relative, but which would otherwise have got you no pension.

I think the other big change has been on the age at which you can draw a pension. So women's pension age went down because of the Second World War. So the argument was women were doing jobs that they hadn't done before, industrial jobs and so on during the war, so they would be getting a pension of 60 men still at 65. you then get legislation requiring that to be equalised, but also a sense that as we are living much longer we weren't, you know, working down the pit anymore. We weren't smoking all our lives doing heavy manual jobs, medicine had got better. So for all those reasons, we were living a lot longer yet we were still getting a pension at 60 or 65, for 30 years, and the system just couldn't cope.

Mubin: And when that started back with Beveridge and after Second World War, people weren’t drawing down their pension for many years really were they?

Steve: That's right. So that the expectation was that you would draw a pension, it would cover you for a few years. And that would be it. So there are some public service pensions, I think the police where it wasn't unusual to draw a pension at 50. And then live until late 80s. And I mean, my late mother-in-law was an NHS nurse, I think she lived, she lived to 90 ish, she drew a pension at 60s, she probably spent nearly half her adult life drawing a pension, you know, so you can kind of see why the sums just don't add up.

Mubin: So Felicia, it's not just the government that's providing pension support, employers are key too. Can you tell me the difference between defined contribution and defined benefit?

Felicia: So defined benefit pensions, ultimately provide a guaranteed output. So this means you know exactly what you'll get when you retire.  The risks are borne mostly by the pension providers who need to ensure that they're able to meet the obligations decades into the future.

And then we have the defined contribution pensions or DC pensions, which on the other hand, are based on guaranteed input. So this is invested and what you receive is dependent on how the investments perform.

So for a few years now, there has been quite a transition from DB pension to DC in the private sector.  This was mainly because with DB pensions, it was becoming increasingly difficult to predict what was needed in order to deliver a set amount in the future. So pretty much what Steve was saying people were living longer, and it was getting really difficult to provide this.

But there is an issue with this transition. Essentially, a shift of the investment risk from the employers to the individuals. So it means individuals are left more exposed to financial markets. And as a result, retirement income may be subject to greater variability than before.

Mubin: So if you're invested in, at the moment, with markets plummeting, you're having a really scary time. And you're bearing all of that risk?

Felicia: Essentially, yes, especially if you're on a DC defined contribution pension scheme. People who are on the DB pension scheme a little bit more protected, because their pension pot is guaranteed.

Mubin: And it was mainly risks wasn't it? The risks being borne by the employer, which has seen this reduction in them offering these DB schemes the fact that they'd have to put more money aside?

Steve: I think one of the challenges of funding these defined benefit final salary, you sometimes hear them called pensions, is you've got this rigid promise, as Felicia was saying a moment ago, it's guaranteed. But of course, how you fund it is with a pot of money. So the company pension fund has a pot of money, it's invested, you don't know how the investments are going to do, you don't know how long people are going to live. And in the lifetime of these schemes, our expectations of how long that will be has grown. So the bills gone up, you have to pay inflation increases in retirement, according to the law. So you don't just pay a pension at retirement, you've got to increase it. So when inflation is 10%, do you have to pay 10% extra so as well as just the cost of this, there's the uncertainty.

And I think a lot of employers didn't like this number on their balance sheet, that they can't really control and then governments come along and regulate and add new costs and so on. And a lot of employers just said, ‘We don't want this’. So, they shut them down, And what they do with the new sort of pension is they just pay their percentage in and they walk away. They can decide how much - they can be generous, so it needn't be cheaper. It generally is because the old system was just so comprehensive. The individual then has this pot of money. And I think what you were saying about this year in the markets, I do a weekly column for This Is Money and people write in with their queries. Some really passionate, upset letters I've had this year from people whose pot of money - DC pensions - have fallen. And if they were 30, or 40 years old, well, kind of fine in the sense markets go up, markets go down, you've got decades to cope. If you're 63. And you were thinking of retiring next year and your pots gone down 30% - what do you do? Or if you're in retirement, you're 73 living off a pot and the pots just gone down 30%. So that's the future world that people are now coming into.

Mubin: Yeah, it's, it's really quite scary stuff. Now just sticking with DC schemes, this defined contribution. A decade ago, we brought in this wonderful policy called auto enrollment, which actually Steve you brought in. Felicia, could you just explain what it actually is, why it was brought in and what have been some of the benefits because this is something that you've been looking at as part of this Living Pensions work at Resolution?

Felicia: The auto enrollment policy was first proposed in the mid 2000s by the pensions commission in order to increase pension participation.

It essentially requires that employers must enroll their employees onto their workplace pension scheme. Employees must be aged 22 and over, earning over 10,000 pounds a year in order to qualify to be automatically opted in. But they do have the option to opt out

The government also sets the minimum contribution rates, which as it stands is a total of 8% - 5% of the contribution is made by the employees, and then 3% is made by the employers. And I think that we shouldn't understate how much of a success this auto enrollment policy has been. So thank you, Steve. Yeah, it's really encouraged a lot of pension participation amongst workers. As a result, we've seen the proportion of workers with any type of workplace pension rise from the low point in 2012 - 55%, to about 79% in 2021. So that means many more people than before will actually retire with some kind of pension pot. Just to add, in our analysis, we actually found that the biggest increases of takeup have been amongst the groups that formerly had the lowest take up. So this includes the low paid, and those in low paying service sectors.

Mubin: Steve at this rate, you'll be getting a statue in terms of all the public good you've been doing. Are there any other benefits from this? And could you just say a bit about some of the downsides? It was clearly a very ambitious policy; it was never going to do everything in terms of solving the problems.

Steve: Yeah, I mean, I think you would say it's been an amazing start, but there's a long journey to go. So the 55% figure you just heard quoted was an average across the public and private sectors. But in fact, obviously, lots of nurses, teachers, civil servants, pretty much all of them, I mean, 90 odd percent would have been in a pension. So in the private sector, it wasn't much more than about one in three workers was, you know, by the time this all started, building a pension, so building a real problem for retirement.

So about 10 million have now been enrolled in a pension and stayed - about one in 10 opts out, which is fantastic, because you're free to opt out, but most people stay in. But that 8% figure that you just heard quoted, and it's not even 8% of all of your earnings, it's 8% of a slice of your earnings. So it's, you know, it works out even less than that, all of us around this table would say, is not enough. It's a great start, but it's not enough. Now we know we've got a state pension, which you know, the new state pension next April will be more than 10,000 pounds a year. I'm sure of that. We don't know the exact figure, but I'm sure it'll be over 10,000 a year, which is a great foundation, if you're part of a couple and most people who retire are part of a couple - that's 20,000 a year. So, it's a good start. But your auto enrollment pension on top of that, if all you do is put in the legal minimum. And if you only started when you were 50, or something, because you hadn't done much before, then you're really not going to build that much on top. So although my kids are in their 20s, they'll probably be all right, you know, if they ever do a proper job, and you know, work through their lives auto enroll stay in, etcetera - they won't be rich, but they’ll be okay at these levels.

Mubin: And if they stop spending on avocados on toast

Steve: Well, I wave my fingers every breakfast time at them, it doesn't do any good. But you know, if you've got 50 years of this fine, 8% - it probably gets you there. But if you don't start till halfway through your working life, that lots of people haven't - we really have to accelerate this. And my worry is we've got stuck. You know, we've had the big start, we've got all the firms in, we had a big review in 2017, with ideas for taking it further. And five years later, the 2017 review hasn't been implemented yet. And today, if you said, well, workers should put more in - well, no, cost of living crisis. Firms should put more in - no, we want businesses to be investing. Government should put more in – oh no, the government's broke. So you know, where's this money going to come from? And we need a plan and we haven't got a plan.

Mubin: From what you're saying it's really this case about where the resource is going to come from and who's going to foot the bill. And Felicia as part of this work with the Living Wage Foundation, you're looking at this concept called Living Pensions and what that rate may be, where did you come to? So we're saving 8% via auto enrolment, what should it be?

Felicia: We came up with a figure roughly about 12% of all earnings, so not just on the qualifying earnings. What we actually found was that the vast majority of people weren't saving at the 12% benchmark on all of their earnings, which is quite surprising, but also quite scary. We think that this was a combination of two factors.

One, that there simply is still a lot of people who aren't saving towards a pension, despite the auto enrollment policy. I think in 2020, about 35% of people still weren't saving towards a pension. And then the second factor is that people who are saving still aren't saving enough.

Mubin: And there was some startling statistics in that report weren't there, I think it was something like four in five aren't on track to have a decent standard of living in retirement. And was it 1 in 20 low paid workers aren't on track?

Felicia: If you are a low paid worker, you're much less likely to meet the living pensions benchmark. And it is quite tough at the moment, especially with the cost-of-living crisis, where people are having to make the decisions on where they get the extra income to cover some of the high inflation that they're facing, which might lead people to even opt out of some of these pension contribution schemes. However, we did see that with the government schemes such as furlough, actually, pension opt out rates didn't increase as much as we thought they would. Because people's incomes were basically protected – well, most people.

Mubin: Yeah, that's really interesting, isn't it that where you get this good solid investment from the government to protect incomes that people feel they've got that safety net. And that's what we don't really have enough of at the moment.

Steve: And I thought one interesting thing you mentioned the furlough scheme was I was amazed that the government paid the pension contributions for workers on furlough for the employer. So there was a risk- auto enrollment comes in shiny, new, relatively benign environment, you hit a crisis, a pandemic, there would be a risk, the government just said, we're going to shut it off. You know, this is a crisis, we're going to take away the requirement on employers to pay into pensions for three years until it's all calmed down. Not only did they not do that, they paid the contributions for employers who were employing people on furlough. And as you've just said, the members of the schemes on the whole didn't opt out. Inertia is just such a wonderful thing it turns out, so we kept people in. And now we've seen the cost-of-living pressures. And even with that, although pension companies have done a survey and a third of people are thinking of opting out. That's not what's happened. What’s actually happened is a slight increase in opt-out. So people join a company, they're enrolled - slightly more, you know, 10%, not 8%, or something are opting out. But that's still incredibly low. People are on the whole - who've been in for a while - a few of them are stopping, but mostly they're sticking in. What we are seeing, however, is people were over 55 dipping in. That's where we're seeing the cost of living pressure. So it's not people not joining pensions, it's not people not staying in pensions - it's people later in life who can access their pensions just starting to dip in as pressures on the finances increase.

Mubin: Yeah, that's really interesting insights, Steve. So, we are talking about these big changes that have happened to the retirement landscape. And one of the big outcomes of that has been this really significant drop in pensioner poverty. When I used to think about poverty back in the 80s, it was always pensioners who were on the front pages struggling to keep warm. And we don't see that so much in terms of our perceptions of poverty. But those numbers are starting to creep up again. What was behind that significant drop, because it's a real success story, was it the reforms we’re talking about or was there other stuff going on.

Steve: It takes a while for making workers save into a pension to feed through into pensioner poverty. So, a lot of what we're talking about, you know, that 30-year-old the 40-year-old has been auto enrolled, we'll see the impact of that in pensioner poverty in decades to come. But not yet. So for today's retirees, it's a mixture of really, really good traditional pensions - defined benefit, final salary, call them what you will, but the old style ones, and, I think we're at peak DB. In other words, you know, we're at that moment where it's about as good as it's gonna get, the people who had decades in these generous company pensions are now retiring, you know, the baby boom generation are now hitting pension age, and so on. That's the peak, that's going down now.

We published a record a report cheerily called the ‘Ski Slope of Doom’, which was about how these DB pensions have peaked. And it's going to be downhill all the way for those. So each generation retiring in future will have less and less of that. But the DC cavalry, these new pensions can't be seen over the hill yet. And that's the worry, we've got this kind of canyon if you like, I’m mixing my metaphors here. But the DB tides gone out and the DC cavalry hasn't come over the hill, and that's the problem. But at the moment, we're enjoying the past, we're enjoying the fruits of previous generations of DB pensions, plus a better state pension. So since 2010, we've had the triple lock, you hear talked about a boost to the value of the state pension. So that's helped. So it's been a combination of factors. But as you say, the tide may be turning.

Mubin: how much is homeownership helped in relation to boosting incomes in retirement, has that made any difference?

Steve: I think one of the things you don't want to be in retirement is a renter. In other words, a lot of the benchmarks that are set for the amount of income you need in retirement, assume you've got a mortgage that you've paid off. So there are lots of costs that you have when you're working age you don't have in retirement. So you hopefully don't have a mortgage, you don't pay national insurance, you probably don't have childcare costs, travel to work costs and so on. So in retirement, the benchmark often used is 67%. Two thirds of what you used to have is enough to keep you going. Well, that's fine. If you haven't got to pay a rent out of that, but if you still got to fund a rent, you do just need an awful lot more. And so we've had, particularly things like Right to Buy, that's like 30 or 40 years old, but you know, the right to buyers were in their 30s and 40s. Now they're in their 70s. And so that's a generation of people who wouldn't have been homeowners who now are who've now got much lower costs in retirement. So again, that's a boost. But homeownership seems to have peaked a bit and issues about younger generations. And although, you know, maybe they'll buy but by later, some of them won't buy at all, and then they'll have to fund rent in retirement. And clearly, that's not a good place to be.

Mubin: Yeah. Or they may suddenly get some inheritance in their mid to late 60s and be able to get on the housing ladder that way.

Steve: Yeah, although I guess the risk is that the people who inherit inherited wealth tend to be wealthy on average, you know, so is it the homeowners who inherit the housing wealth, you know, and whether they’ll cascade that down to the 30-something renters, or the 30-something living under their roof that they want to get rid of.          

Mubin: Yeah, that's very true. I'm hoping you're not relying on inheritance there Felicia being the youngest person in the room

Felicia: I’m waiting for my dad to sell his house, got to get hold of that deposit money.

Mubin: How about minority ethnic communities? What's the picture there?

Felicia: So very recently, Lloyds Bank released a report on saving for pensions They found people from minority backgrounds are more likely to cite expecting to work during retirement or relying on family versus white British groups who said they would rely on the state pension or their employers pension. What we do know is that this is worrying because people from minority ethnic backgrounds tend to have a lot less wealth, and therefore might be less protected in the future when it comes to retirement. So it is quite worrying to see that there is quite a racial or ethnic disparity between these different groups when it comes to pension savings.

Mubin: Yeah, and also just worth highlighting that minority ethnic communities are more likely to be in poorer health in old age, and so this idea that somehow working throughout all of this is going to be a panacea is quite problematic, isn't it?

Felicia: It is, it is quite worrying to think that, you know, people from minority ethnic backgrounds expect that they would need to work in retirement, when it's a time you should be relaxing, you know, should be enjoying your grandkids if you have any, so it is a concern.

Steve: It is, as you say, quite a risky strategy, isn't it saying - oh, well, I'll just work till I'm 73 or something. Because we know that, you know, anything can happen. And you can't really rely on that, essentially. And I think as well as, as you said, there is great diversity in the approaches people take, but something I've noticed is a greater reliance on   as a way of saving for retirement. So I think we also have to take account of other ways people are saving for their retirement. And although, you know, I think pensions are a good thing, if people are putting serious money into property, as well, not the home they live in, but you know, residential property, that's part of the picture as well I think.

Mubin: The triple lock, and I think that came in under your watch, Steve. So again, another sort of credit to this statue being raised for you. What exactly is it? And does it need reform? Because we've had a lot of talk about it recently, in terms of keeping pace with inflation.

Steve: We have I mean, the story of how the triple lock came about is, is interesting, at least to me, and I've got a captive audience here. So let me just tell you what happened.

So, you have to go back to 1980 and Mrs. Thatcher. So, in just before Mrs. Thatcher came to power, the state pension went up in line with average earnings. So what that means is if wage earners were getting 10%, the pension would go up 10%. And the idea was that the pension would keep pace, so pensions wouldn't fall behind the working population. It hadn't been going for very long. But that was the policy and Mrs. Thatcher famously broke the earnings link. So I can remember going to Blackpool and national pensioners convention and Jack Jones and all of those demanding, you know, banners restore the earnings link.

Mrs. Thatcher switched that to prices. So she said, look, you've got a pension, all it has to do is keep pace with inflation, because then next year, you can buy the same basket of goods as this year - forget earnings, that's too expensive, we'll just do prices. So for 30 years, till 2010, the pension was linked to prices, Gordon Brown famously once put the pension up 75 Pence, because inflation was very low 1.1% of not very much was not very much. And of course, there was a riot. And they had to put it up five quid the next year because it was an election year. So you know, everybody could feel that price linking over a long period wasn't great. So the triple lock idea said, You should do the best of three numbers; two and a half percent minimum, so we never get the 75 P again; inflation so you've always got the same basket of goods at least; or wages so pensioners don't fall behind. Those are the three strands. So in 2010, the coalition agreement, Lib Dems and Conservatives said, the next five years we'll do the highest of those three. In 2015 at the general election, every political party had the triple lock in their manifesto, interestingly, because everybody said all grey vote, lots of people voting and frankly, also recognition that the state pension was still one of the worst in Europe. I mean, you know, five years of the triple lock hadn't reversed 30 years of decline.

But then the Treasury started saying - hang on, this is getting a bit expensive. So in 2017, the conservative manifesto, Theresa May said, double lock, so get rid of the two and a half percent but you know, no triple lock, but then they didn't win the election. They had to do a deal with the unionist and the unionists said we want the triple lock back, so the triple lock came back and by 2019 and the conservative manifesto had the triple lock again. And of course, that's been kept until this year. And then we had COVID, and the pandemic, and the earnings numbers went haywire. And they said, for one year only, we're going to relax it. And now we've got this big debate going on about - but can we afford it? And, my argument would be, you shouldn't do this forever. But we do still have a very low state pension, more and more people are going to be dependent on it in the future women in particular, because women, on average, have much lower private pensions, and 30 years of damage between 1980 and 2010, can't be fixed in 10 years of recovery. So, I think recognising all the points about intergenerational fairness and all of that sort of stuff. I still think all of us need there to be a decent state pension. And I just don't think we've got there yet.

Mubin: Yeah, that's a strong case. Felicia, is that is that sort of Resolution’s take on this too. In terms of intergenerational fairness?

Felicia: On the face of it, we agree with the triple lock as it protects pensioner incomes. However, we may not necessarily agree with the 2.5%, as it's quite an arbitrary figure, it's good to hear Steve, explain how that came in. But from our perspective, that means if both earnings and inflation is low, pensioners still get 2.5%. But the same is not reflected when we think about people who are getting working age benefits, where they don't have a system, like the triple lock to protect them.

Steve: And I would agree, if you look at working age benefits, some pretty brutal policies have been implemented. In my spare time, do some debt advice, and often advising families with three or more children who are affected by a cap. So they're only getting benefits for the first two children. And you see the real impact, you know, benefit freezes, benefit squeezes, caps and all of that means that, , there is a chasm now between working age benefits and pensioner benefits. You're a day before pension age, you're deemed to need, let's say, 90 pounds a week to live on the day after you need 170,180 pounds to live on. We have got those things out of kilter. But for me, that's an argument for doing working age benefits properly, not for undermining the state pension.

Mubin: So we've got some consensus here, but it will be interesting to see actually, what our new chancellor comes up with in relation to both of these. One thing we've not talked about is pension freedoms, it sounds like some sort of national liberation struggle, but were you to blame for this as well Steve?

Steve: I was somewhere near the room where it happened, yes.

Mubin: Well, it'll be interesting to hear your take on it as to how successful it's been.

Steve: So, we've talked about these pots of money, pensions, defined contribution pension, so you've built up let's say, 50,000, 70,000, whatever it is, and the law used to be, there was only one thing you could do with that pot. And that was give it to an insurance company, and they would give you what was called an annuity, a pension for life, a guaranteed amount. And what most people did was got what was called a level, a flat annuity, it didn't go up in line with inflation, it's just a flat amount, and it lasted as long as you did.

And if you think about 2015, when all of this happened, interest rates were close to zero. So, if you took your pot of money to an insurance company, they would give you a pitifully small amount of money for the rest of your life.

Now, just imagine we hadn't in 2015 relaxed that rule, which I'll come back to. And still people in 2015, 2016, 2017 have been taking their woefully inadequate pots of money pensions, handing them to insurance companies who have given them woefully inadequate flat annuities. We then had 10% inflation with a bunch of pensioners whose incomes weren't going up at all because they'd been forced to buy an annuity, we'd be having pensioners on the streets now. So, actually forcing people to use their pots of money to buy an annuity, often a flat annuity - wasn't a great outcome. And we've just put 10 million people, mostly, as we've said, into this sort of pension, the risk of the reputational damage to auto enrollment was big, because the destination was annuity. So ,what pension freedoms said is fine, if that's what you want, that's still there, you can still buy one. But if not, you can do two things basically take the lot out, pay your tax take the lot out and people with very small pots, that's what they do. And they use it to pay off the mortgage or you know, enjoy it – heaven, shock, enjoy their pension - or they take it into retirement into what's called drawdown, so they take a bit they manage it, they invest etc. And the beauty for me of pension freedoms, and I was once asked by an interviewer, what about people buying Lamborghinis, you know, will, they will rush out and buy and I said, if people want to buy a Lamborghini, it's fine by me. And I found myself on the news bulletins that night for having told pensioners, they could go and buy sports cars. But the idea was, you can fit it to your circumstances. So for some people, if they got a couple, two state pensions, 20,000, some defined benefit pension, and then this pot of money, actually an income for life wasn't what they needed. They needed some savings, something for the kids weddings, for a deposit on a house for the kids, pay off the mortgage, you know, it enabled people to use their pensions for what they wanted to.

Suddenly, this is the future. This is new, modern flexible, your savings for you to do with what you want. And we got lots of people transferring out of their final salary pension, maybe some of them shouldn't have done but transferring out of the final salary rigid pension into these flexible ones, because it enabled them to flex. So although it's an unfinished journey, we need to help people more with advice and guidance and all the rest of it. I do think and you can tell in my tone of voice, I'm excited about letting people control their own money, not telling them what to do with it.

Mubin: Yeah, and I think you paint a really good picture there. But I think what you hint at is actually the problem relating to guidance and advice, certainly we’re hearing it through a lot of research that we fund, particularly where people have got quite small pots, and advice can be quite expensive in relation to their pot. And that's the bit that we still really need to resolve, don't we.

Steve: There's a long way to go on all of that. I mean, to be honest, if people have got a small pot, there is almost nothing they can do with it. I mean, you know, I don't want be silly about this. But if you've got a £7000 pension pot, frankly, you're gonna take it as cash. And if you use £7000, to pay down some credit card debt or to do that house, repair the roof or replace the rusty old car you've had. That's not a bad outcome. The big problem we've got is these pots are too small.

Mubin: Can I just touch on one other element, which is tax reliefs and who they go to and what kind of reforms we might need, or is it all okay, are we are we doing the right thing? We spend, I think over 30 billion pounds on these tax reliefs relating to pensions. Is it money well spent?

Steve:  I think we could spend this money a lot better. I mean, the basic the basic idea of tax relief on pensions is not unreasonable. So if I earn some money, I normally pay tax now. And if I'm willing to set that money aside so that I don't enjoy it now, it gets invested and I draw it later, well, I should pay the tax later. And that's really the idea of tax relief. So you defer the tax, you don't pay no tax, probably, you don't pay the tax now, because you don't enjoy the money now, you lock it up. And as your reward as it were, you put off paying the tax, you pay the tax in retirement, and the sweetener is a quarter is usually tax free, what they call the tax free lump sum. And it's the one bit of pensions people have heard of they like it's popular.

The big problem is that the cost, it's actually very skewed bluntly to people like me, you know, I'm in my late 50s, in a good job, I can shovel money into a pension, if I want to, I pay a higher rate of tax, so I get extra tax relief, because I'm putting lots of money in and I pay a higher rate of tax, so I get more tax relief, because of all of that, I'm putting off higher rate tax, and so on. And so it means that the cost is quite, you know, the potential benefits are going to people like me, and I'm not the people who need the help.

At the moment, the way it works is if you put a pound in, they say well, 20p you would have paid in income tax, so it cost you 80p to put money in a pension, and the government puts in 20. So you end up with a pound - it's cost you 80p. Well, giving people 20 p when they put in 80, just isn't enough for me, because we'll never get there. So I would like to have some sort of what they call matching. So if you put in 80p, the government gives you 80p. Now, you might say, well, where's the money gonna come from? It's gonna come from people like me, you know, so we have to be more generous to people with these new pensions, starting out on their pension saving journey, you know, doubling up the first £1000 pounds they put in or something and then tailoring it away for high earners. Basically tilt what we spend towards the people who really aren't going to be able to save enough, that's what I would do.

Mubin: So effectively, we need to give great incentives to those people who’ve got quite really quite small pension pots. At the moment, we're not doing that we're just giving quite large incentives to those people have got, you know, the 1, 2 million already stashed away

Steve: I haven't got 2 million, just in case, for the avoidance of doubt. If there any burglars listening, I don't have 2 million.

Mubin: No. I wanted to touch on how good the UK is, in relation to this retirement landscape? Are we sort of leaders in the field? Or, actually, are we middle of a pack or lagging behind? I feel as if we're kind of like, quite way ahead of other people. But Steve, you'll probably tell me whether or not there's others who are doing a better job than here in the UK,

Steve: It's very mixed, I think, so. People often say that our state pension is one of the lowest in Europe. And one of the reasons for that - there’s two really - one is, as an electorate, we don't tend to vote for high tax parties. So in Scandinavia, on the whole, they pay a lot more tax, but tend to get a better welfare state. You know, in America on the whole they pay less tax and have a less comprehensive welfare state. The joke is that Britain's wants a Scandinavian welfare state for American levels of tax. And you just can't do that. So there is a slight sense of we get what we pay for.

But I think the other thing is we assume in our system that people will have a state pension and a private pension of some sort. It's designed like that. So if you just look at half the system auto enrolement itself has been a world leader. I mean, we weren't the first to do it, but as a minister, and my successors, have people coming around the world to look at how we did it, because that worked. But what we don't really do is collective pensions.

So you'll be familiar that there are these new in the UK types of pensions called collective defined contribution - a little bit of jargon - but the Royal Mail are about to introduce one for their workers. And the idea is you save in this pot of money pension, but there's still a target. It's not rock solid guaranteed like the old ones, but it is an aim and the pension also have a target pension and if the fund goes really, really badly, everyone gets a bit of a squeeze. So it's not guaranteed. But over decades, they're trying to build up a big pension and one with some sort of smoothing and pooling of risk. And I think probably, we'll see multi-employer versions of this. So I don't have to work for the Royal Mail, basically, there'll be others I can join. And I think that's a development where Canada have this, the Scandinavians have this, this kind of collective defined contribution is probably the future I think.

Mubin:  I mean, we've got remarkable consensus on all these pension issues, it's quite unusual in politics. Why do you think that is? Is it all to do with trying to court the older vote?

Steve: I mean, we heard earlier about the Turner Commission, and they worked really hard to bind people in. And so the auto enrollment deal, there was something for everyone. So the trade unions liked it because it was sort of mandatory pensions with an opt out. The CBI, the business, we're willing to sign up to 3% contributions, because actually all the big firms are doing that anyway, you know, the government liked it, because it meant people have pensions, they wouldn't have to pay them benefits in retirement. So there was a bit for everyone. The problem really is this next step, I think, and there's less consensus there, because I think employers should be paying more, you know, the employer is paying three and the worker five isn't right in my view, I think we need to get to five plus five percent, but I can't see the current government doing that. So I think we may now start to see that consensus breaking down a bit.

Mubin: I feel as if we need to get you back as pensions minister, you've made a really good case in this podcast for that. So lastly, I'm going to come to - if there was one thing you'd really like us to do in terms of policy change in this country, what would it be? So Felicia,

Felicia: Just one thing? 

Mubin: One, yes.

Felicia: So hard. Okay, I'll do something that is already on the government's agenda, which is essentially get rid of the lower earnings limit for auto enrolment. So this means a lot more people be able to start saving towards their pension as soon as they join their employer. So for every pound that they do start earning, that they're paying a certain amount on their earnings, all of their earnings, essentially, that's, I guess, the most immediate thing, but if I can sneak another one in go do something for the self-employed, because auto enrollment was good for employees. However, there isn't a similar kind of scheme for people who are self-employed. So it'll be good to see that worked into some of the policy for the future.

Mubin: And the Fabians were talking about this recently, about a sort of scheme where if somebody was self-employed put in 5%, the government would match it with 3%. So that that could be an interesting take, and we might actually be able to increase some other tax charge on the self-employed too. So, Steve, what's your big idea?

Steve: It's got to be, it's what do we do about my ski slope of doom? The thing we've relied on for a generation is dying out. And we haven't got the DC cavalry, the new pensions at scale. So, you know, I think pensions Ministers get distracted. They've got a thousand things to think about, , but they’ve got to do this one thing, and it's get more cash going into defined contribution pensions, and it could be changing the limits, I think we need to increase the employer contribution. Even if we can't do it today or tomorrow, let's legislate now, for a plan to do it in three, five years’ time, whatever it is, because if we wait, then it then takes another three to five years to do. And I think there is just this ticking time bomb of pensioner poverty that we come back to if we're not careful.

Mubin: Well, listen, a huge thanks to you both, because you've made what is often quite a dry subject really interesting. So thanks very much for your time.

Steve: Pleasure.

Felicia: Thank you.

Mubin: If you enjoyed this episode, please like, share and subscribe on your preferred podcast platform, it really helps us spread the word. And don’t forget, series one is available now across all major podcast platforms and on our website. Until next time, thanks for listening.