The long-term future for pensions when people (seem to) want more accessible savings vehicles
How many people think about pensions and how much money they will need once they have stopped full time work? What are their expectations as to how long they will live if they retire, in good health, at 55 or 60 or 65 and maintain an active lifestyle? What debts still need to be cleared once full time employment has ceased? What sort of activities/hobbies/holidays do they envisage when they are no longer working full time or even at all?
Apart from the public sector, very few people are still in open final salary schemes where largely the money issues around retirement are largely taken care of. There are many well documented reasons why final salary pensions are increasingly getting closer to extinction – too expensive due to increased longevity, too much regulation and too complex and time consuming for sponsors faced with ever increasing black holes in their funding to meet triennial valuations.
Whilst money purchase pensions have been around for decades before the financial problems of the first decade of this millennium that resulted in the crash of 2008, the switch from final salary has accelerated exponentially over the last 15 years. In many cases, money purchase arrangements, where a person has an individual pot that depends on stock market performance for growth is not necessarily an inferior pension; however, typically, an employer and the employee contribute significantly less than the amount that would have gone into a final salary pension and in the UK, we do not have the collective DC schemes that have grown up in, say, Holland which deliver better rates of return through economies of scale. [To be fair UK master trusts may achieve this in the future but that is still a while away]
To encourage (quasi) compulsory savings the Government introduced automatic enrolment in October 2012, where the biggest pension schemes right down to even micro -employers (i.e. hairdressers, fish and chip shops) will ultimately have to make certain that employees are in a compliant pension scheme by 2018. Whilst the main benefit of automatic enrolment is to get every individual thinking about his/her post work savings requirements, clearly there are several concerns – the principal one being that many people will just assume that being in a pension scheme and contributing 1 or 2% or even 5 or 8% will provide an adequate retirement income when a contribution rate closer to 15% of salary will be required.
So, whilst I feel automatic enrolment to have been a positive start and the opt-out (employees physically must choose to withdraw every three years or they are automatically re-enrolled) figures remain much better – at around 10% – than the 30-40% predicted by the pessimists, there is considerable work to be done in communicating the costs of saving for retirement to the public. The recent announcement that three sources of information – TPAS (The Pensions Advisory Service), Pension Wise and the Money Advice Service are to combine will, I think, ensure far better consistency of approach and joined up thinking.
Hopefully, it will assist with some of the issues around the Government’s “Freedom and Choice” initiatives first mooted in the 2014 Budget and introduced the following year which allows for people to access their pensions savings from age 55. The scammers and spivs have been out in force, though the Pensions Regulator’s “Scorpion” campaign seems to have been quite effective in this regard. A recent survey confirmed that pensioners were more adept at recognising con-artists than younger generations.
In some cases, for example accessing your pension pot to clear a debt like a mortgage, freedom can be good thing. It is about striking a balance between being practical around immediate needs and the longer term supply of income in retirement however and I think that it seems significant that as we adopt more of an Australian type model where the pension or superannuation (the Aussie money purchase pension) can be accessed at 55, Australia is actually looking at some type of annuity purchase to underpin the freedom around withdrawing some/all of your pot so that people are not totally reliant on the Australian state pension. This is, of course, the system we have largely moved away from.
This will be the central conundrum facing retirees, employers and the Government in the next century and it will take a considerable period of time to get the balance right. For the time being, I see the situation getting worse before it improves as we get a generation of workers not having as much to spend in their retirement as recent previous ones. This will clearly be a shock to some people. In a world where each generation expects a better life than the one before it, that will take some getting used to.