The struggling economy in the UK has significantly hindered efforts by ministers to implement crucial pension reforms, according to Gregg McClymont, a former shadow pensions minister. McClymont, who served in this role from October 2011 to May 2015, pointed out that the stagnation of the economy has made it increasingly difficult to advocate for necessary changes, such as raising contribution levels and enhancing the efficiency of the pension system.
He emphasized that the economic difficulties faced by the UK over the past two decades are the primary barrier to reform, especially given the stagnation of real wages since the financial crisis of 2007-08. In a conversation with The i Paper during the Pensions and Lifetime Savings Association conference in Edinburgh, McClymont remarked, “It’s tough to increase contributions on employers and employees when real wages have not been rising. Employers feel pressed, and certainly individuals feel pressed.”
According to McClymont, the Labour Party has not prioritized pension reform in recent years, largely due to these economic limitations. He cautioned that while the UK’s auto-enrolment system has been a commendable success, the nation is lagging behind countries like Australia, where pension savings are invested more effectively, and employer contributions are substantially higher.
However, he noted that economic pressures have created challenges for both employers and employees, delaying any potential progress. McClymont stated that if he were to assume the role of pensions minister, currently held by Torsten Bell, his foremost goal would be to ensure that pension savings “work as hard as possible” for individuals during their retirement. He stressed the need for investments to be made in the right assets at the right cost, guaranteeing that savers receive the “best bang for their buck.”
The Government is anticipated to introduce a new pensions bill in the coming months, which McClymont believes will aim at enhancing the efficiency of pension funds. Nevertheless, he acknowledged that any meaningful changes would be contingent on fostering a stronger economy.
“The Australian defined contribution (DC) system has been quite successful,” he explained. “The funds in which individuals are invested have significant allocations to infrastructure, particularly for those working in that sector. This has proven to be very popular there.”
He further elaborated that one of the key lessons from Australia is the consolidation of pension funds, leading to larger, more efficient funds capable of investing in significant assets at appropriate prices. McClymont also critiqued the complexity of the UK pension system, arguing that it poses challenges for individuals trying to convert their pension savings into a reliable income during retirement—something that Australia has managed more effectively.
One of the most pressing issues, he pointed out, is that UK pension contributions remain too low. Currently, the minimum auto-enrolment contribution stands at 8 percent, but in reality, many individuals contribute approximately 6 percent due to minimum thresholds. Numerous experts advocate for this figure to be raised to 12 percent over time. In contrast, Australia has already implemented a mandatory contribution rate of 12 percent, fully funded by employers.
Now serving as the executive director of public affairs at IFM Investors, McClymont indicated that while an employer-funded model is unlikely to be adopted in the UK, increased employer contributions will be essential in the future. However, due to the prevailing weak economy, he does not foresee any increases in contributions during this Parliament. He proposed the idea of gradual increases of half a percent per year going forward.
“My sense is that it’s unlikely that contributions would rise now, but we hope that this Parliament sets a pathway for future adjustments,” he noted. McClymont acknowledged that while auto-enrolment has been a significant advancement, further steps are needed to ensure individuals save sufficiently for a comfortable retirement.
Another challenge he raised is the multitude of small pension pots in the UK, which complicates management for individuals. Australia has largely addressed this issue by consolidating everything through the tax office, making it easier to reconnect lost pension pots with their rightful owners. He proposed simplifying the UK’s pension system as a solution—this would not only streamline management but also enhance outcomes for savers.
Additionally, he addressed the ongoing debate about reforming the 25 percent tax-free lump sum that retirees can withdraw from their pension pots. While he recognized that a financially strained government might consider changing the rules, he cautioned against such moves, asserting, “Confidence in the system is crucial, and maintaining stable rules is of utmost importance.”
McClymont believes the current Labour leadership understands the significance of stability in pension policy, but he added, “We have a Spring Statement coming up, so we’ll just have to wait and see what unfolds.”
