Video | What the US presidential election could mean for UK pensions

Louise Doherty: Welcome back to the Thinking Forward podcast. Here we discuss trends and developments affecting the UK pension industry, to better understand how people in the UK can achieve better outcomes and we supercharge this through global learnings.

I'm Louise Doherty and I'm Head of Marketing for Strategic Initiatives at Standard Life. I've been working on the Thinking Forward Thought leadership programme since we've launched. And today I'm delighted to be hosting the Pod along with Mike Ambery.

Michael Ambery: Thanks, Louise. Hi, I am Michael Ambery, Retirement Savings Director for Standard Life, and today we're excited to be joined by our guest speaker, David John.

David John is a Senior Strategic Policy advisor at the AARP Public Policy Institute in the US, where he works on pension and retirement savings issues. He also serves as a deputy director of the Retirement Security Project at the Brookings Institution. David has worked at Capitol Hill for four US representatives, both Democrats and Republicans.

Today we're going to discuss with David the US pension system, policy reform and the possible impact of the US presidential election and what this might mean for us in the UK.

So hi, David. A warm welcome to Thinking Forward.

David John: Thanks for having me.

Louise Doherty: Okay. To kick us off David. Let's think about the 101 of US pensions. Can you give us a quick lowdown on the system? What are the key features, the challenges and how does it compare to us in the UK?

David John: There are a lot of similarities, but there are also a number of differences. So, in the US, the any the offering of a pension or retirement benefit is strictly voluntary.

So we have about 47% of the workforce who doesn't have any sort of retirement savings or pension system. And we know that if you have payroll deduction, you're roughly 15 times more likely to save for retirement.

The average retirement age is roughly 62 to 65. But we have a social security system which is somewhat more generous, than the UK system. And, you don't get full benefits until you're about 67. Your benefits continue to grow until age 70. And that's an inflation indexed, monthly income. The primary retirement savings vehicle is the 401k. The 401k is actually named after a section in the tax code. And it was essentially an accident. There was a tax attorney who was looking for ways back when people had, defined benefit pensions to help, especially upper income people to save more.

He came across this little piece in the tax code and it became like the Holland Tunnel. Actually, it is now the biggest part of the retirement savings system. We also have individual IRAs, individual retirement accounts, which are like your ISAs to some extent.

So, if we get to, investments and things along that line, they're actually somewhat similar.

Most investments are target date fund if you're auto enrolled. Auto-enrolment is also voluntary, but virtually all of the large and mid-sized companies plan sponsors, we'd call them, actually do have auto-enrolment and a couple of other auto features about which we should probably talk.

Louise Doherty: Okay. Well, you've already talked to me about Secure 2.0. Can you give us a bit of background on this for the listeners?

David John: Secure 2.0 was, the follow up to Secure itself. It was passed in December of 2019. And contrary to what a lot of people think, this was not actually a major reform.

This was not a structural reform. This was a number of different pieces that were brought together. So there are something like 91 different provisions in this. And they range from everything from a government match to certain lower income savers, which should help a great deal with, the wealth gap to, improved opportunities to offer annuities or other types of retirement income solutions to a payroll deduction, emergency savings system, which also is, gaining traction in the US.

So there are loads of different provisions in there, from the little, tiny ones to the really important ones. 

Louise Doherty: And I guess I’d quite like to hear a bit more, I'm thinking about our audience and the employers and the pension managers. What does that mean for them and what they can offer?

David John: It actually increases one of the problems that we've faced, over time is that while the impediments to offering a savings system have been pretty much removed, for the most part, we had a number of regulatory impediments to offering an income solution at the end of a working career.

Up until recently, for instance, an employer would choose an annuity provider and they would be responsible for making sure that that annuity provider continued to be active in making all payments 50 years into the future. So, those have been removed.

We have different types of income solutions which are being offered here. So it's really been a major change. And one of the things that's really kind of fun about this is that it sparked a great deal of innovation in the private sector. So we're starting to see some really interesting products.
that meet some of the concerns that people have about locking in money early and things along that line.

Louise Doherty: And what do you think back in the UK? What can we learn from this? What the successes and the failures?

David John: There are a number of things that, can be looked at here. One of the things that is growing in interest is, whether or not somebody is able to save enough. And we, we have a different system in that we don't have the recommendation that you have for auto-enrolment.
So, and, an employer match is voluntary and it's structured by the employer itself. 

So the employer then decides. Usually with, of course, the guidance of the professionals who are actually handling it. But yeah, so they do that.

But we have something called auto-escalation. Auto-escalation says essentially, you will be auto-enrolled at a certain level, but your percentage of income that goes into your account will gradually rise. Usually at the same time you get a pay raise. So if you got a pay raise of 3%, 2% would go in your pocket and 1% would go into your retirement account. 

So that's one of the big ones at this point. And we trying to get there so it’s mandatory, auto-enrolment is now mandatory for any new retirement plans. But auto-escalation is not.

But again, it's a feature that we see in virtually all of the large and medium sized plans. It's a great way to keep people on that journey, to get them in the door with a lower percent.

And as your earnings increase to then pay a bit more. And one of the things we've discovered, often through some of our state programmes, which are helping lower income people to save, is that people are largely indifferent to what they are auto-enrolled in. 

So initially it was a 3% level. And of course, a lot of people thought, well, 3%, I'm doing exactly what I should do. I'll leave it 3% forever. But we found actually that people have the same participation rate. If it's 5%, 6%, even 8%, once you get to double digits, 10%, then they look at it say, oh, wait a minute, that's a bit too much.

Louise Doherty: Mike, I know that you are really keen to talk about the election.

Michael Ambery: I am really keen to talk about the election. I'm actually really keen to, touch on a couple of points there, which is around, default options.

let's change that away from auto-enrolment and auto-escalation, which I think are great ideas and ones that we should consider in our own reforms. Just moving on to a couple of other default options. Enlightening the topic. Biden and Trump. equally defaults that we've seen before, to see what comes through.

So 5th of November means something for us in the UK, which is a huge range of fireworks, where we look at the sort of, taking apart Parliament in various different guises. It's quite apt, 5th of November appears to be a good day in the US for an election. Now I don't have a crystal ball for you. I don't know whether Louise you have one, but without that, could we do a little bit of gazing into that crystal ball to see what you think will, happen in between now and the 5th of November?

David John: I think the first thing we're going to see over the next several months is far too many discussions of who's ahead and who's not ahead and that sort of thing. Typically, in a US election, May is when things start to gel. But that doesn't mean that things won't change radically between now and the 5th of November. At this point in time, I could flip a coin and make a convincing case for both sides and what's going to be key, I think in the UK, which a lot of people forget, is that we don't have one presidential election, we actually have 51. So the key is, how many states and large states, each one has a different number of electors. You win to get to the 270 needed to be become the next president. That's one thing. 

The other thing is then, what’s going to be the control of the House and the Senate? Those are individual elections also. If I had to guess right now, I'd say that there is a fair chance that the Democrats might take the House, but especially after what happened on Tuesday where we had primary elections, the Republicans are probably slightly favoured to take the Senate. So that's going to lead to a certain level, if that happens, of course, a certain level of, inertia or frustration.

Michael Ambery:That makes total sense to me, I guess. Turning that into pensions, do you anticipate any sort of gridlock there or any progression? How do you think, that sort of difference in between the two houses  and the president will actually impact pensions?

David John: That's going to be really interesting because despite the fact that we're divided on so many areas, pensions have been one of the areas where we're still bipartisan now, a couple of the former leaders of the areas have been retiring, and two of them will retire, this November. But even so, there is a general agreement that we still need to do better. We still need to do a great deal more. 

We also have the equally important issue that our social security system, essentially our government pension system is, scheduled to run out of money to some extent, in about 10 years. And there is going to have to be some work done to shore that up, whether that's increasing taxes and it has its own dedicated payroll tax or whether or not there is, a change in benefit formulas. So there's going to be a lot going on. And regardless of how the election ends up, we still have hope that there is going to be sufficient progress in our pensions work.

Michael Ambery: Absolutely. I'm hearing huge parallels there between the US and the UK on all of those issues, particularly what we'd call public sector pensions and the affordability of state pensions going forward. Just moving through to that. So I think that is one similarity to the UK. How else do you feel. The US will impact the UK and its pensions industry?

David John: Well, I think one of the things that we're going to have to look at,  if Trump wins and if Trump has majorities in the House and Senate, is going to be what's going to happen to investments at that point, because Trump has said,  first off,  I'm going to put a 10% tariff on everything,  especially those from China, might even be higher.  

The second thing he says is that I'm going to have massive tax cuts for everyone. He said that in his most recent, rally there. 

Third thing, though, is that he's talking already about the need to rein in the Federal Reserve Board, our central bank, and put that under more political control. So if he does that, there is likely to be a short-run boom in the US economy, followed by one of the largest inflations, levels that we have seen for some time. And we've learned we're continuing to learn. The US inflation numbers came out yesterday. Fighting inflation is never easy. If we go back to the 1970s, it was sort of like one of the old hammer horror movies. It actually had to be defeated three different times before it were finally gone away.

Michael Ambery: I love it, you're conjuring images for me of, horror films and political areas I don't want to talk about. 

We said we'd lighten the subject, but I'm going to go deeper, if that's okay. Okay. Let's go to, President Trump. he released a campaign video reiterating his opposition to ESG investing. there's a number of other DE&I perspectives as well that, Trump on and some of his supporters feel quiet, confident and comfortable with as well. Let's not go into those, but on ESG in particular, do you think any sort of outright bans in ESG, and that sort of investment area will come through under President Trump?

David John: Oh, absolutely if there is a second Trump administration, for one thing, Trump is absolutely convinced that wind farms cause cancer. We're not quite sure how that works, but, he's convinced of that, and he has already said directly there will be no federal subsidies. There will be no federal investment in, mostly environmental areas. 

So, yes, I anticipate that's going to be a big question. And this actually raises something that we're starting to see here, because about 70% of the world's internet traffic takes place about 30 miles from my house just outside of Washington. It sucks in a huge amount of energy. 

And already even with investment in solar farms, one of which is next to my, neighbourhood, we are not seeing sufficient power to keep, running that. We're seeing coal generators that we're supposed to close down, continuing to be operated specifically so that they can deal with these, server farms. So that's going to be an interesting question going forward as to what is the actual effect of that? And sadly, I don't think that's the sort of thing that's actually been discussed at this point.

Michael Ambery: Yeah. It's pretty, important what you say there in terms of health concerns and otherwise. I can see the headlines coming through of, cancer-causing wind farms so we shouldn't invest in these particular areas. We obviously recall, how to deal with Covid is clearly, bleach. 

David John: Yes. Absolutely, injected in there.

Michael Ambery: So moving on away from President Trump to President Biden, how do you feel he will, maybe impact things in terms of his current state and current play? In the UK we've not really seen much from...

David John: This is one of the real problems with Biden, because he has actually done some rather revolutionary legislation, but he doesn't push it. He’s sort of shadowed over by this Trump phenomenon there. So even in the US, he doesn't get nearly as much credit as he's due. 

But Biden is saying directly, I'm the one who's looking at your future. I'm the one who's going to help us to move into the 22nd century and to make sure that we start to deal with things like environmental issues, changes in the workforce, making sure that we deal with things like, the wealth inequities and things along that line. 

So if he gets sufficient majority and wins, of course, I expect more of that. But that's of course, keyed on whether or not he can actually get something like that through Congress.

Michael Ambery: And do you see that? Because I'm calling through on that. Do you think, see short term benefits and long term benefits in different ways there. So from President Trump, I’m sort of feeling that you'll have, a surge in the economy, it’ll be great for a term maybe, or for a period. And with Biden, it is more for the long term. and that's quite difficult under current economic environments for any voter, any consumer to actually consider. Can I have the cash now? Do what do I need that, do I want to feel a pulse? Or do I take the long term approach?

David John:  Yes, and that's the question because Biden is actually building for the future. our infrastructure desperately needs upgrading, and that includes the power grid and bridges and things like that. And Biden is already working on doing that. There are some items that he's also dealing with that are going to be better in the short term, increasing employment opportunities and things along that line. 

But they're not the big, exciting things that somebody is going to go, wow, this is just the best thing I've ever seen there. So that's going to be an interesting question going forward as to whether or not he can actually get the credit that frankly, he's due.

Michael Ambery: Yeah. Yeah, that makes a lot of sense. We certainly don't see that from over here in the UK. I don't know Louise.

Louise Doherty: I saw him on TikTok the other day. I know I was actually really interested as a marketeer. To see the change in the way that the advertising that goes along with the campaign. So previously lots of money on television advertising. Now they're diversifying in different audiences. So I wonder if that's a smart strategy to try and share more of, of this future focus that he has with a more diverse audience of voters?

David John: It will if it works, let's put it that way. One of the things we've seen is that if you turn on, regular television in the US and of course, most of ours is, commercial television, you will see literally political ad after political ad after political ad, usually on both sides of the same issue or the same candidate or things along that line. And people, frankly, are tuning it out. They're not looking at this anyways. 

Louise Doherty: White noise almost.

David John: Exactly. Yeah. So they're now trying to do something more, which a lot of its internet advertising. And frankly, the good news of that is you can scroll right by it.

Louise Doherty: Don’t say that to a marketeer.

Michael Ambery: Please do!

Louise Doherty: You read all of those adverts, don’t you!?

David John:  But, of course your ads are completely different, but there we are. But, what he's also trying to do is to bring out certain groups. So if you look at the Biden victory in 2020, he had massive majorities in the Black community, the Hispanic community, and among women. 

Now among women he is very strong. And that's partly due to the Supreme Court's abortion ruling and especially in, the suburban areas. But in both the Black and Hispanic communities, we are seeing a reduction in his support. And most of this is not someone who's going to vote for Trump. It's just that they're not going to vote. They're tuned out. And this is especially true for, say, younger Black voters or that area. So it's going to be really interesting, and somewhat nerve wracking to see whether or not this actually works going forward.

Michael Ambery: Brilliant. I can't wait to hear more of that commentary as we go through to November the 5th. David, we could talk, I think all day about your views and crystal ball gaze, and it'd be good to, touch upon a couple of more subjects if we can, whilst we've got time. in particular, probably trouble issues that we have in the UK. 

So if you don't mind being what we call in the UK, an agony aunt, where we ask you our problems and maybe you try and solve them with a little bit of advice for us if that's okay. I'll talk about small pots and consolidation, which, as Lou and I talk about quite often in terms of a sort of topic in the UK. So we have a private sector that’s focused primarily on the employer, driving pension solutions, driving automatic enrolment. Do you see more flexibility in the US on members maybe selecting their own pension pots and determining how they're invested?

David John: You know, that's a really interesting question because we see a large number of people, especially younger people who are auto-enrolled, and they really don't deal with, many of them don't even know that they're auto-enrolled when it comes right down to, yeah, but starting around age 40 or 42 or so. And we think that's about when retirement suddenly becomes a potential reality as opposed to this fantasy. Somewhere in the future, we start to see more people who are starting to mess with the way their pots are structured there.

The small pots issue is a big deal in the US too, and it especially hurts those who most need the retirement savings, lower income people, Black and Hispanic women, small business employees, etc, and in a lot of cases the money gets lost. So we actually have something now which has just started, which is called the Portability Services Network, which is private sector. It's a combination of the retirement clearinghouse, which actually developed the software, and most of our largest, record keepers. So they'll have, by the end of the year about 83% market share. And what will happen is, if you have a pot of under $7,000, $7,000 is a level where an employer can roll off the pot if they don't want to deal with it if they think it's too expensive or things. 

But in this case, if a pot is rolled out, there will be a ping to all of the other record keepers that are participating. Say, hey, do you have, an account for Joe Jones? And if the answer comes back, yes. And they obviously do a really good job of making sure it's the right Joe Jones there, that money will be automatically moved and consolidated into his ongoing pot, unless he decides, for some reason or another, he doesn't want to do that. And that seems like it required an awful lot of background work for sure, but it seems like something that actually works and works fairly easily.

Louise Doherty: Would the money be transferred to the active pot then? 

David John: Yes, yes.

Louise Doherty: Okay, because we've been thinking obviously a lot about pot for life over here in the UK. Mike and I have been looking at stapling in Australia. Yes. but if you don't have the plumbing in place to be able to move the pot with the member, then it feels like that's the infrastructure you need. 

How long did that take? 

David John: About 12 years. 

Louise Doherty: Yeah, that's the problem. That we've been hearing.

David John: Now I'm actually also in the process of doing a paper on, pot for life. And, there’s one other aspect of a pot for life. And obviously there are some concerns and such as what happens to the actual structure. Do you actually end up with a decent set of, investments and services and things like that? But one of the things that we are running into is that we have a seemingly large - the data is pretty poor - group of people who are contingent workers. And this ranges everything from the person who earns $100,000 for consulting on a, you know, a weekend or something to, in our case, where I work, the security guard who is actually working for a company that provides labour there and auto-enrolling them is incredibly difficult. 

So one of the advantages of a pot for life, assuming you can deal with all the other questions, is that it could, in theory, be structured so that you have, money coming in, regardless of what type of, employment status you have. So, ongoing probably be something that we can work on for a number of years.

Michael Ambery: I think we should move on to retirement income.

Louise Doherty: Thinking about the changing needs of our customers reaching retirement. Yeah. I keep talking about a modern retirement and fix and flex. And what do people really want? Because you don't retire now on one day and hang up your suit, and then suddenly you're in the garden. 
It's not reality, is it?

David John: No 

Louise Doherty: So we're thinking about what different kind of innovations can we do with product sets to try and help people with guidance, with advice. But what are you doing in the States? 

David John: We actually have exactly the same problem with it, exactly the same complexity. And given the fact that we're a somewhat litigious bunch the worry that, you're going to be sued if you make the wrong decision, even if you did it in, for a perfectly reasonable manner. We are seeing and there was actually a really interesting, development there, which is that one would start to have, a purchase of an option to buy an annuity starting about age 40 or so, 40 or 45 somewhere in that area, and you would buy a slice of annuity income each year, which deals with interest rate risk there.

And then as you reach retirement, you have the opportunity to either execute or take that annuity income for life. Or you could say, well, you know, my circumstances have changed. this really doesn't meet my needs. I'll just take the cash value.

And the cash value is comparable to having it invested, in the rest of the pot. So you're not really losing anything with this. But the flexibility here enables us to deal with, people who move jobs, say, at age 50 or something along that line, or people whose circumstances change. So that's one of the things we're seeing.

We also have a growth in phased withdrawal plans and a phased withdrawal plan is a pooled investment sort of like, the default options and things like that, but it's done to generate income and both growth and a stability in income. And with this, if somebody chooses that, they will receive a monthly check in the same amount for 12 months, and then that will be adjusted up or down within to certain bands, depending on how the pot itself is performed. Okay. So we're seeing a lot of that. There's a tremendous amount of innovation and thought and the like, but we recognise, precisely, as you said, that retirement is change, that we have. Most people, actually try to phase down, as opposed to taking my gold watch and going to the golf course and it's a complex issue and one that's really hard for the individual to understand. So some sort of a default, 
or guidance is going to be essential.

Michael Ambery: I think that for us is really important and we often discuss a philosophy. There's a range of products that are available and when to deploy those based upon individual need is what come then. In the UK, we have sort of a targeted support or whether that's guidance or advice is one of the questions that I think, sort of comes through to us. 

And that probably moves us on to a final topic, which is on future advice. And how did you give that advice? What’s the innovations there in the US? Here in the UK, we see a range of products, but we rarely see individuals take a number of those products. They plump for one, go for that and that's it. yeah, we'd like to see more. I don't know whether the US is more advanced to help individuals and guide individuals.

David John: The problem that we face is that most people go into retirement totally unprepared. We at AARP did a survey of Americans, age 50 plus that supposedly our membership band there and we asked people both before and after retirement, does having a financial plan, is that essential for a secure retirement? 94% of those who had not retired yet, and 96% of those who had retired said, absolutely, yes, this is an essential part, 20% of those who hadn't retired, and 33% of those who had retired actually had one.

We are seeing, well, we have a problem because we have a much larger population also. And we have, different rules and regs for, guidance and things along that line. But one of the things that we're looking at is artificial intelligence. AI in many cases, these are this guidance is done, remotely over a computer screen or something like that. Although we find older people want a little bit of both, they want the guidance through the screen, but they want to meet with someone at some point there, also. 

We see AI appear on the screen to help the individual advisor make decisions that benefit the individual. We are having a huge fight legal fight right now as to whether that has to be done under a fiduciary standard or not. There. We'll see. But in January, I was in a conference in California, and one of the providers there actually had an AI advisor, which was totally artificial. It wasn't a human being at all. Okay. It lived on a screen. It looked like, a woman who is probably in her 50s or so and, it interacted with you. Now, with apologies, it sounded a little bit too much like a marketing person. 

Louise Doherty: That’s what I was thinking. I thought you were going to say it sounded like me. Perhaps she did.

David John: No, not at all. Different accent. So, among other things, but that's being looked at as the future, because this is one way that you can interact. And at the same time, we don't have to recruit hundreds of thousands of advisors to deal with the, frankly, hundreds of thousands of people who are retiring each year.

Michael Ambery: Makes total sense. I guess where that comes from to me is two issues; cyber security and innovation. I'll plump for innovation if that's okay. if we go to Amazon, Tesla, and even Microsoft, do you think they'll come into our finance space a little bit more so? So they've got the technology. We know there's innovators in space, we know in the Valley. And there's equally a lot of excitement here. Do you expect disruption. 

David John: Yes absolutely. The only question that has to be dealt with. And actually Amazon tiptoed up to the financial space and then tiptoed back down again. is whether or not you deal  with the whole question of the regulatory regime we have for our financial institutions, a very split up regulatory regime based on  what type of charter you have, what type of services you offer, and things along that line, and what Amazon and Google and some of the others are looking at is combining these into, a fairly effective platform.  

So how they actually managed to get through the regulatory hurdles is probably what's holding that up. But the security is equally concerning. And that's something that we don't see a whole lot of yet. But, we see an awful lot of discussions among our record keepers and investment advisors. 
that, they're worried, very worried.

Michael Ambery: And equally, we see the same thing, I think, in the UK Parliament, there was discussion yesterday around spending on defence against cyber security. We've seen obviously in political elections, certainly interference from overseas. Areas, which and obviously I've watched The Equalizer 3, which had a clear story around cyber security and, and that sort of factor there. 

But as a final piece, noting previous concerns over advice from presidents. Would you mind giving us just one more pearl of wisdom? Would you advise anything else for us to consider in the UK as we look towards our next election?

David John: Well, in what way, do we talk?

Michael Ambery: In terms of pension reform, what should we really focus on? For me, it would be what you said before, automatic enrolment levels of adequacy and auto-escalation are really key areas that we've dodged for about a decade. 

David John: And we have too. So I mean that's yeah, we've made progress in some areas and not progress in the other. The other one I would add to that, which I think is going to be an interesting conversation, is trying to combine pots because when you reach retirement age, having to deal with five different sources of income is going to be very confusing.

Michael Ambery: David, that brings us to the end of the episode. I'd like to say a special thank you, to you, Mr. David John, for joining us for what I think is and hopefully, Louise, you agree, some fascinating discussion of the US pension system, policy reform and possible impact of the US presidential election. And please do let us know if there are any topics you'd like to hear more about, or if you'd like to join on a future pod.