Reforms to last a lifetime

How important was resolving means testing in the pensions reform project?

If you left the system as it was, the danger was that you’ve auto enrolled some
people into something where part of it disappears in a means-tested clawback. And that would have been a very difficult thing to do. You’re using the power of nudge, but you’re not clearly telling people that this might not be a good deal for them if they are towards the bottom end of the income distribution. We wanted this to work all the way across the income distribution.

What was your biggest concern when conducting your review?

Bringing in the self-employed, and this is unfinished business today. Maybe the challenge is just intractable. Auto-enrolment really doesn’t work unless you’re on some category of monthly pay. If you are self-employed, maybe you just have to accept that there are limits to how much the state can help you.

How did you go about achieving a consensus on your reforms?

We conducted in-depth market research with big groups of members of the public in four cities around the UK. We had them for six hours and we presented the facts – here’s what’s happening to people’s life expectancy, here’s what’s happening to the number of people over 65, here’s what’s happening to private savings, here’s how defined benefit schemes are disappearing, this is the trend of what people’s income is going to be in retirement in 20 years’ time if we don’t do anything else. 

And we asked whether they wanted to pay higher taxes through National Insurance to have a higher state pension, or did they want to keep it linked to prices, and did they want to have the state pension age go up? At the beginning of the day they voted for a mathematically impossible combination. Nobody wanted National Insurance to go up. Nobody wanted the state pension age to go up. And everybody wanted the state pension linked to average earnings, not prices. Then we did a series of presentations and had roundtable discussions and took a vote at the end of the day.

And we had a coherent result, which is that people could see there was going to have to be a combination of actions and they were no longer collectively asking for the mathematically impossible.

Where did you first come across the nudge used in auto-enrolment?

We started looking at auto-enrolment patterns around the world and there was data on auto-enrolment in 401Ks in the US, which is their equivalent of a defined contribution scheme.

[Co-review head] John Hills, who died tragically last year in the middle of the Covid crisis, knew his economic theory and we started pulling out the basic literature. Richard Thaler and others at Chicago were beginning to write about it and it caught our attention. We looked into it and fairly quickly we said, well, this is almost certainly the answer, isn’t it?

What is your view of George Osborne’s pension freedoms?

They will be a very bad thing for some people. We could have looked at a variety of options like having to annuitise to give yourself at least an income of X and beyond that, do what you like.

Our work was careful, deliberative, fact based. And frankly, George Osborne’s introduction of wide pension freedoms at retirement was made up in the month before a Budget to give him a big splash. It was absolutely an example of not researched, not thought through stuff.

How did the pensions industry react towards the creation of Nest?

Existing pension providers understood the reality that a catch-all provider was needed for those savers that were uneconomical for the industry to serve.

But I think in retrospect we should have been tougher with the industry. The industry was not resistant to Nest – it was resistant to Nest being able to take
limitless transfers and contributions from richer people.