When Steve Webb arrived at the Institute for Fiscal Studies (IFS) as part of the new graduate intake in 1986, he expected to be working with industrial economist John Kay on a research project on privatisation. Instead, Kay left the IFS and Steve wound up working with economist and author Andrew Dilnot on tax and benefits.
That twist of fate has led to a 30-year career dedicated to helping people escape poverty through sensible financial planning and, in particular, preparing for retirement. Part of that time was spent in Parliament, where Steve made his mark as Pensions Minister in the Conservative-Liberal Democrat Coalition Government. In the 2017 New Years Honours list he was knighted for his services to politics and public service.
Some might see that as the culmination of a career, but not Sir Steve. Since losing his seat in 2015, he’s been director of policy and external communications for pensions provider Royal London, where his priorities are to encourage a greater take-up of pensions and nudge people towards building a savings habit.
“What I love about pensions is every bit of your life shapes your pensions outcome – whether you’re single or married, a renter or a homeowner, in good health or poor health,” Steve says. “Therefore, you can’t have sensible pensions policy without thinking of the houses we live in, the jobs we do and the families we make and break.”
Politics and auto-enrolment
In 1997, he turned over an 11,000-vote Conservative majority to win the constituency of Northavon in south west England for the Liberal Democrats. His subsequent rise through the party eventually took him to the Department for Work and Pensions when the pensions auto-enrolment policy was being introduced. Under the scheme, workers aged 22 or older who earn £10,000 or more a year are now automatically enrolled into a contributory workplace pension.
Auto-enrolment has worked “massively, profoundly, quickly and dramatically,” says Steve, adding that younger people face too many other financial pressures to start thinking about pensions in their 20s. “The priority has been to get them enrolled, get them up to a reasonable level of contribution and then leave them alone. When they’re in their 40s and beyond and start getting interested in pensions, they’ll actually have a serious amount of money to make some interesting choices with, but we just shouldn’t expect your average twenty-something to be thinking about pensions. We’re just pushing against the grain if we do.”
New state pension
Although Steve played a part in delivering auto-enrolment, the change that wouldn’t have happened without him was the introduction of the new state pension. Absent from any party manifesto in early 2010, he used the bargaining power the Coalition Government afforded the Liberal Democrats to get the new state pension onto the policy agenda. Steve argues that the system, applicable to everyone retiring after 6 April 2016, is simpler and fairer than its predecessor.
He says: “The importance of the new state pension won’t be seen for a while, but it produces better outcomes for women and supports auto-enrolment by making saving pay. It will also simplify things massively so that people know what they will get from the government and that if they need more, they need to provide for themselves.”
Late on in Steve’s time as Pensions Minister, he oversaw the introduction of pension freedoms. Fears that pensioners will blow their pension pot on luxury cars and holidays are not unfounded, says Steve, but definitely exaggerated. FCA research reveals most pensioners take 25% of their pot as a tax-free cash lump sum, as they have always done, and then invest the rest or use it to pay off debt. Steve thinks that makes sense for some pensioners. A pension pot of £20,000, for example, might deliver a lifetime income of just £20 a week. In those circumstances, using the lump sum to pay off a mortgage or build a home extension to improve your quality of life might prove to be a better use of the money.
“Ironically, it’s the excessively cautious I’m worried about, not the excessively reckless,” says Steve. Many low-income pensioners, with little trust in the investment sector, are putting their freed-up pension pots into cash ISAs. “That feels like a safe thing to do but cash ISAs pay nought point not very much, and inflation is at 3%, so they’re losing real money every year.”
Rather than the young or the old, the big problem group is the one in the middle – the people who entered work after defined benefit schemes closed, who perhaps didn’t join a pension scheme when they began working and who came to auto-enrolment too late to build up a meaningful pension pot. They are the people now in their 40s.
At the heart of the problem for all generations is the lack of value the public places on professional financial advice, even though the evidence suggests they are missing a trick. Research conducted by Royal London and the International Longevity Centre finds that people who took financial advice were, on average, £40,000 better off ten years later compared with those that didn’t.
The issue, says Steve, is that financial advice is seen as an industry, not a profession. “We need people to understand they’re dealing with a professional who can make a transformative difference to their quality of life.” But the financial sector does need to meet savers half way. Product impartiality is key if advisers are to build public trust. And a lighter regulatory touch is needed to encourage financial advice firms to take on more business.
He believes a cultural shift is needed to make saving as normal as spending. It’s a challenge not helped by one big elephant in the room – the present tax relief system, which is “broken and subject to too much change”. If ministers can introduce stability to tax relief, and stop putting limits on how much we can put into our ISAs and pensions, savers will have a chance of providing for themselves in retirement, says Steve. “HMRC is terrified that someone is going to save too much and hoover up all the tax relief and we’ve got to find ways of taking a big deep breath and just chilling a bit.”
The original version of this article is in the Q1 2018 print edition of The Review. All members, excluding student members, are eligible to receive the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting ‘Yes’.
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