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Tim Sharp says as the conclusion of the government's AE review approaches, we must start asking more fundamental questions about what sort of pensions system we are building

With December almost upon us, attention can turn to the coming attractions of the festive season. The joys of an Advent calendar, trips to Father Christmas's grotto and, this year, the conclusion of the government's review of automatic enrolment.

An excited pensions policy world might wake up to a number of stocking fillers. Maybe there will be simplification of the contributions system that penalises low earners? Perhaps the earnings trigger could change? Could younger workers be brought into the fold?

But as the system matures, and the millions of people who just started saving amass reasonable sums, we also need to start asking more fundamental questions about the sort of workplace pensions system we are building.

In particular, are we putting in place arrangements that rely too much on chance, and land oblivious individual savers with the consequences?

For a start, whether you are enrolled in a scheme in the first place varies hugely from sector to sector. Trades Union Congress's (TUC) analysis of official figures found that in agriculture, two-thirds of employees are without a pension. In the wholesale and retail sector nearly 1.9 million employees, some 44.7% of those working in the industry, are not enrolled in a workplace scheme.

While recent reforms have vastly improved enrolment rates, many of those in sectors without a strong tradition of pension provision and with typically low wages are still missing out.

The amount an employer pays into a pension is a key determinant of whether the sums saved by a worker for retirement are sufficient for a decent standard of living. But this varies enormously. Some 88.4% of pension scheme members in accommodation and food services receive employer contributions of less than 4% of salary. But only 15.2% of those in financial services have such low employer contributions.

Once the money is in, investment returns add a further layer of chance.

Analysis of historic investment returns by the Pensions Policy Institute found the pension pot size for someone saving for 40 years in a typical defined contribution default fund can vary by up to 40% depending on market conditions.

We are increasingly importing this uncertainty into the retirement stage, too. Unless you are, say, the heir to a wallpaper dynasty, you are going to need a replacement income in retirement.

But there is emerging evidence that savers are now moving to cash and drawdown as their main options. This throws up a number of new risks.

Inflation risk is underappreciated, not least because we have had a remarkable period of low price rises.

And few retirees have a secure sense of their life expectancy - or the chances of living beyond that mark. Research from Aviva has found 65-year-old men underestimate their life expectancy by 3.3 years on average.

But even if we were all a bit less pessimistic about our probable lifespan, in a system where the individual is responsible for managing their own longevity risk there is still a great deal of uncertainty. There is an approximately 50% chance that a 65-year old man, for example, will live beyond his life expectancy of 86.7. And around one in four will live to at least 93.

Drawdown brings with it the ongoing uncertainty caused by investment returns. The TUC recently looked at the impact of the sequencing of good, bad and average years of investment returns. In a simplified model, the same size fund, achieving the same average returns, with the same level of drawdown, could last anything from 16 to 30 years. But how many investors actually realise that their income could run out - or even that they are investing it?

Surprise is a crucial ingredient of Christmas. But it is time to look at ways of bringing more predictability into pensions.

Tim Sharp is policy officer at Trades Union Congress

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