Out-Law Analysis | 08 Jan 2016 | 2:34 pm | 3 min. read
The UK is a nation of spenders, not savers. Recent pension policy announcements have focused on government's desire to 'strengthen incentives to save' - but all the incentives in the world will never be as effective as compulsion.
The 'soft' compulsion of automatic enrolment is a step in the right direction, although it will be years before we know how effective this has been in a normal interest rate world. Years ago, employees had to join their employers' pension schemes and this compulsory pensions system was the envy of the world. An earlier attack of 'freedom and choice' put paid to that, and now no government will ever reintroduce proper compulsion.
At the very least, automatic enrolment contribution rates must be increased as today's savers are not putting enough away to give them adequate incomes in retirement. It is a shame that the Chancellor pushed back the increase in contribution rates by six months, thus delaying further much needed pension saving. The move was billed as a measure to help businesses administer the changes. In fact, it was a straightforward tax raid on pensions, netting the UK Treasury £840 million.
Employer engagement and contribution is a big part of influencing people to save. Consulting actuarial firms have developed new modelling tools to predict member outcomes, with various levers to pull to improve the likelihood of achieving the chosen income replacement ratio: contributions levels, asset mix and years to retirement, for example. Some of these tools are targeted at employees, are very attractive to use and will hopefully improve member saving and decision making.
Member communication is being moved to a new level, with 'gamification' taking hold. Creative consultancies exist that are driven by a desire to help people make good, long-term pension decisions. Not cheap - but employers that invest in these services report positive engagement from members leading to decisions during saving and at retirement.
We all know by now that, increasingly, people will part-work part-retire until quite late into their retirement phase. There's not enough money around not too.
The 'missing link'
Through workplace schemes, individuals are taken through a passive journey of enrolment, contribution collection, default assessment and, in the run up to retirement, default disinvestment. It's all done for you. However, at retirement, you are transported to a 'wild west' of complex financial decisions which you have to face on your own, with no training.
Help is at hand from the providers. The tools and science exist to guide people through these decisions, even taking into account the individual's wider circumstances. However, providers are constrained from offering these tools as to do so risks being found to have provided regulated advice, with all the risk and regulatory costs that come with it.
Much of the 'squeezed middle', with pension pots of between £30,000 and £200,000, cannot afford financial advice. The most important change that the government can make to help these savers is to sort out the advice gap. This could be done through a combination of creating a regulatory 'risk-lite' form of advice, advances in lower cost 'robo-advice' or by providers deciding to proceed with offering the tools anyway.
Alternatively, these tools could be offered through the workplace with 'safe harbour' protections in place for the employer. A link somehow needs to be forged between saving in the workplace, where accumulation is managed for the individual, and retirement, where the individual is cut loose to fend for themselves.
A continuing role for ISAs
Individual Savings Accounts (ISAs) will continue to provide a simple, easy-to-understand savings product that meets most customer needs, limited on the amount you can save. Most customers only have a limited amount to save and don't reach the maximum amount. However, an increasing number of 'ISA millionaires' show you can save a small amount each year and achieve good results.
The question currently on everyone's lips is whether pensions will ultimately move over to an 'ISA-style' taxed, exempt, exempt (TEE) tax treatment model combined with top-up payments from government. We won't find out the answer to this now until the 2016 Budget. There are huge practical difficulties in moving to this model, which all no doubt will be well-presented in the responses to the Treasury's consultation.
The government is already road-testing a TEE plus top-up system with its new Help to Buy ISA. As of 1 December 2015, first-time buyers have been able to save up to £200 a month into one of these products, which is then topped up by the government by 25%. The total government top up amount is capped at £3,000.
Once tested, this TEE plus government top-up model will be ready to roll out to pensions.
Simon Laight is a pensions expert at Pinsent Masons, the law firm behind Out-Law.com.