Based on my (admittedly unscientific) vox pops over the years talking to taxi drivers and the like, people see little distinction between the Mirror Group scandal, Personal Pension misselling, the Equitable Life collapse as well as other more minor industry failings, lumping them all together under the general perception that ‘pensions are a rip-off’.
Pensions are also burdened with jargon, complex rules, weighty decisions that people feel ill-equipped to deal with and they are eye-wateringly expensive to fund to a decent level. To cap it all, the benefits of engaging with pension planning are pretty abstract, in that you have to wait for thirty years to get pay-back; in the meantime all you get is less money in your pay packet and a nagging fear that investing 100% of your retirement savings in agriculture futures may have been a bit of a gamble.
So lots of people don’t sign up, and it’s actually getting worse rather than better. A recent survey by Prudential showed that voluntary saving in pensions had nearly halved in the past year. Worst of all, some employees choose not to join non-contributory employer sponsored schemes – a decision that defies rational explanation. One group pension client we deal with who has experienced this problem with reluctant joiners to such a scheme has actually been sending employees to HR to point out to them in no uncertain terms that an employee who is willing to forego a free 10% pay rise (in the form of an unconditional employer pension contribution) may not have a very promising future at the company; this has proved quite effective.
So the government is introducing Personal Accounts and auto-enrolment as the solution (as well as slowly devaluing the state pension). Personal Accounts might just possibly deliver some positive benefits. The cultural shift to a default position where everyone is a member of a company pension scheme (or the Personal Accounts) is a major step forward in terms of the universal acceptance of the need to save for retirement. Unfortunately the government’s plans are seriously flawed in at least two important respects.
The first is that it may well be a lot cheaper and simpler for employers to switch their staff pension schemes over to provision via personal accounts, rather than through their existing scheme. This is cheaper in terms of lower contributions, rather than cheaper in terms of more efficient running costs, so the possible consequence is that employees will end up with less money in their pension pot. I think that the government isn’t too concerned about this as the other effect of the reforms is likely to be a spreading of the pension contributions across the population – thereby taking some medium and lower income earners off welfare dependency. This leads on to the other key problem though, the question of the means testing trap.
It is clear that under the present system, very many people will be at best only marginally better off as a result of joining either the Personal Accounts scheme or their employer’s existing scheme. If word of this gets out then there has to be a risk that the whole enterprise will fall flat on its face.
There is a third, unrelated problem with money purchase pensions generally, that far too many pension investors do not use their savings efficiently when they reach retirement. This means that they either buy the wrong shape of retirement income, or they buy an annuity from an uncompetitive provider, or in many cases they do both. The introduction of Personal Accounts should bring this problem into sharper focus.
Looking to the future, in terms of occupational pension provision ,we are likely to see several existing trends continue to evolve. This means further migration away from Final Salary schemes, and probably a parallel migration away from Trust based schemes towards group Sipps. I also expect to see more widespread use of salary sacrifice, as it is an efficient mechanism for employers to reward their employees.
The introduction of auto-enrolment is inevitably going to lead to a levelling down of employer pension contributions; possibly no less money going into pensions, but almost certainly spread more thinly. I hold out little hope that we will see further progress on the outstanding areas of needed reform. These include movement away from Means Testing to a more universal state pension and fundamental rethink on Public Sector pensions. The challenge the government faces (and perhaps employers and the pensions industry too) is to increase the general population’s engagement with and understanding of pensions – ultimately this is the most effective way to deal with the pensions crisis.