All quiet on the pensions front

It’s been another quiet month with very little discussion on pensions policy. No parliamentary debates, no press coverage…

(…apart from the postponement announced in the implementation of any charge cap, the new ideas on how to reform the market for annuities, the renewed impetus to progress ‘pot follows member,’ the progression of quality standards, the Law Commission’s review of investment intermediaries, the Institute of Chartered Accountants for England and Wales’ consultation on governance within master trusts, the debate on whether we should adopt a Collective DC model like some of our European counterparts, the suggestion that middleware for auto-enrolment needs to be separately charged to the employer, the announcement to allow people to purchase extra State Pension credits, the controversy of including ‘clause 37’ in the Pensions Bill which could allow a future government to exclude smaller employers from auto-enrolment, the continuing concerns about a ‘capacity crunch’ and the Daily Mail campaign to reform retirement saving).

Did I miss anything? (apart from tens of thousands of employers staging this summer)

Actually, I did.

I recently attended an excellent presentation by NEST where they announced the results of their latest research. No matter what your views are on NEST, it’s difficult to fault their focus on listening to what people say. And people have plenty to say on pensions. I’d do it an injustice to try and summarise here, so read their research for yourself (I recommend it for anyone advising on auto-enrolment)

What I will say is that – according to this study – people have moved ‘saving for retirement’ up their personal priority list from 7th to 3rd. Pick that apart if you will but, in my view, it’s testament to the great start we’ve had to auto-enrolment.

Another report that may have slipped under many a radar amidst recent coverage was the very well researched ‘Help to Save’ publication by the Policy Exchange. Again, worth a read.

I don’t agree with everything in there, but I can’t fault the depth, focus and intention of the study. Let’s briefly look at a few of their recommendations:

Proposal: ‘Replace auto-enrolment with compulsory membership of a pension scheme for all those earning more than the tax free personal allowance.’

My view: this is a last resort if auto-enrolment fails, but so far it hasn’t.

I realise there’s a question mark about maintaining low opt out rates (currently averaging 9%) amongst smaller employers, but that’s for us – everyone involved in making auto-enrolment work – to influence. The report draws on the example of other compulsory taxes that people accept. But they are just that; taxes. I don’t know anyone who’s engaged by their taxes. Let’s give auto-enrolment a chance.

Proposal: ‘Increase the minimum contribution rate to 12% from 8% phased in over 5 years.’

My view: agree in principle, but let’s not run before we can walk.

Much of the success of auto-enrolment participation so far is down to the fact that the contributions are low enough that employers and their employees can adjust to the additional cost over time. The Australian pensions system is a good example to follow but their move from 9% to 12% employer contributions is being phased in very slowly – and that’s after over 20 years of phasing up to 9%. It’ll be 2020 before the full 12% is embedded.

Also, we seriously need to consider other aspects of financial planning; if everyone is in a pension scheme saving 8% of band earnings, the next priority could be getting some life assurance, short term rather than long term saving, health care planning, or a number of other things. Right now, for some, it might simply be the repayment of high-interest personal debt. Retirement saving is a major problem, but it’s not the only gap we have.

Proposal: ‘Make the annuity market more competitive by issuing government annuity bonds. Individuals could buy their initial interest rate exposure from the government with insurers providing annuity insurance only for when this expired.’

My view: maybe.

The key to the whole retirement debate is that we have the debate. The Policy Exchange are quite right to explore this issue much more widely and look beyond simply the value offered by annuities and explore more flexible options. The world is changing, and for a long time to come many people will be retiring with relatively meagre DC pension funds. For some, the issue will simply be to bridge the gap between earning a wage and claiming the State Pension. Steve Webb’s recent comments about promoting the value of trivial commutation rules (i.e. currently those below £18,000) are perfectly valid, even if it seems counter-intuitive.

I’ve not covered all their recommendations, but the blog will become a novel if I carry on. So I’ll stop.

There’s a lot going on in the pensions industry just now and a lot of debate to had. I’d be interested to know what you think…

Share:

2 thoughts on “All quiet on the pensions front

  • Hi Jamie, don’t necessarily disagree with your point on compulsion, but why is there a need to make it engaging? Surely compulsion is the crude but simple answer to it not needing to be engaging? My question (and I don’t know the answer) is what’s the date that we decide its not worked and have to go with the unpopular choice of compulsion?

    Reply
    • Thanks Phil. This is a fascinating debate and there are many pros and cons to the compulsion idea.

      Some people say that the key reason would be to reduce the complexity of the current pension system for employers; they wouldn’t have to worry about opt outs and triennial reviews, etc. In practice, however, compulsion would bring its own complexity as there are a number of people for whom saving into a pension won’t be the right thing to do, e.g. those with protection in place, those with significant personal debt and also, sadly, those whose life expectancy may be reduced through chronic illness. In each of these cases, it would be difficult for an employer to determine the reasons and often inappropriate to discuss.

      Many would also look at compulsion as a tax, rather than a benefit. In general terms, my view is that engaging people in saving stands them in better stead to ensure they are saving enough, investing appropriately, making good decisions about their retirement income, etc. The test is now whether the success of automatic enrolment so far continues with SMEs and then micro-employers. We won’t know the full results of that until 2017, when it seems sensible to review. At that point, I have no doubt the question of compulsion will be discussed again…

      Reply

Leave a Reply