The pensions industry and government must instil a sense of “personal ownership” over pensions in currently underprepared members if auto-enrolment is to achieve its aims, pensions minister Richard Harrington has said.
The rhetoric is a significant departure from the prevailing industry stress on nudge theory and the power of inertia when it comes to encouraging member engagement.
It comes after research led by the Pensions and Lifetime Savings Association found last week that 97 per cent of defined contribution-reliant members have a chance of less than 40 per cent of achieving adequate income in retirement at combined contributions of 8 per cent.
I do feel that our priority must be to get personal ownership of pension plans for people in a way that they understand
Richard Harrington, Department for Work and Pensions
Savers brought into pensions by auto-enrolment are still only paying 1 per cent of their earnings, which are matched by the employer.
Discuss pensions like house prices
Speaking at an event organised by law firm Eversheds last Thursday, Harrington said the transition to higher contribution rates poses significant challenges.
“Our concern is to make sure that by the time the employer is paying 3 per cent and the employee is paying 5 per cent, that people really understand what pensions are about,” the minister said.
Harrington said he aspires for people to talk to one another about their pensions as freely as Americans discuss their 401k plans, or Brits house prices in their area.
He said that he was heartened by early evidence that millennials are saving more than the minimum required, but added that engagement would be vital to future success.
“I do feel that our priority must be to get personal ownership of pension plans for people in a way that they understand,” he said.
New name needed for pensions
For some, improving engagement with workplace savings necessitates a complete reworking of the systems and language behind pensions.
Michael Johnson, independent research fellow at free-market thinktank the Centre for Policy Studies, reiterated his view that pensions are “finished”.
“The word ‘pension’ doesn’t resonate with Generation Y,” he said. “They aren’t harvesting any tax relief.”
Johnson said he expected the lifetime Isa, largely based on his suggestions and due to be launched in April next year, to provide the answer to this engagement problem, and to be spurred on by the Treasury’s desire to amend tax relief, something he called “the juiciest, lowest hanging fruit” for Number 11.
He recommended that the state pension be replaced by a citizen’s pension from age 80, allowing longevity risk to be shared among individuals and the state, and paving the way for a more attractive annuity market covering ages 65 to 80.
Several providers have recently expressed concerns that, with the Financial Conduct Authority still consulting on draft regulation for the product, it may be difficult to design comprehensive services.
Nonetheless, the Lisa does seem to be appealing to members and some employers. Yvonne Pearce, group pensions manager at the Daily Mail General Trust, said her company would be “considering” contributing towards employees’ Lisa savings.
“The issue we have with [the Lisa] is it’s a contract that’s specific to a certain age group, and that feels unequal,” she said.
Trust in inertia
Former pensions minister Steve Webb, now director of policy at Royal London, made clear his misgivings about the Lisa and its plethora of siblings.
“I don’t think the [Lisa] flies for all sorts of reasons,” he said. Webb cited the taxation of pensions as they are drawn as one of the key reasons that more people have not bought “the notorious sports car”, and said he worried that flipping pension taxation on its head would encourage such behaviours.
Enable savers to take ownership of their money
We all know the pensions industry has seen a huge amount of change in recent years. One of the key challenges we face now is how we best explain these reforms, and what they mean for the ordinary saver, to the wider public.
In contrast to Harrington’s focus on member engagement, Webb suggested that future pensions policy should focus on harnessing the power of inertia.
One potential opportunity could be encouraging the self-employed to save into pensions.
Webb suggested that, in the absence of a better proposal, class four national insurance contributions could be raised to 12 per cent from 9 per cent, with the worker choosing whether the additional 3 per cent goes to the taxman or a pension.
“Doing nothing isn’t a good idea, compulsion isn’t a good idea, we need some form of pseudo-auto-enrolment in my opinion,” he said.
