With recent developments within the pension system, this is an exciting time to be involved in the industry because the recent changes are so fundamental that the landscape changing dramatically.
Savers in DC schemes will no longer be required to buy an annuity and will be given more freedom in how they choose to spend their money, there are calls for the lifetime allowance to be scrapped in an attempt to simplify the system, and of course auto-enrolment seems to be effectively nudging employees into contributing towards private pensions.
The effects have been incredible, with Scottish Widows reporting that 53% of people are now saving adequately for retirement, the biggest ever year on year rise with the amount being contributed also rising. Regardless, simplicity is not the same as clarity. While auto-enrolment has removed the difficulty in setting a pension up Scottish Widows also reported that 1 in 3 of the population isn’t sure whether or not their savings will meet their needs in retirement.
This shows that there is further work to be done, auto-enrolment is only partway through being brought in, and with future staging focusing on the smaller companies, the biggest challenge is arguably in front of us. These are companies who are likely to be owned by people who’ve never even given much thought to their own pensions, let alone an entire scheme for their employees.
They’re the developing companies, the emerging technologies- but even the local off license, and take-away who might only have half a dozen workers is going to be required to auto-enrol their employees! What’s more is that as professionals in the pension industry, we know that this is mandatory. On the other hand, many of these business owners do not.
Therein lies the problem: how on Earth are these schemes going to be set up effectively when many of those responsible don’t realise what it is that they’re responsible for? Is it that we’re asking too much? After all, the pensions industry is our industry and not necessarily theirs, right?
Well… yes and no. Look at it this way: in 2010 the government alongside several other organisations began working towards “an enterprise led recovery”. We wanted to see the economy grow through not only the very large businesses, but also the smaller micro-businesses.
Many of these businesses have done well, they’re growing in both productivity and profitability, and have doubtlessly contributed to the UK economy’s return to growth. To do this they’ve had to learn the ins and outs of running a business: marketing, business models, finance, management, intellectual property rights, health and safety, tax… the list goes on, and this is neglecting the fact that the initial product has to be developed! Pensions are now another area that these companies will have to learn about, but this shouldn’t be seen as another obstacle to stumble over.
The pension system is unusual because it is contributed to by all circles of society, not simply the pension professionals. A sturdy pension can help retain staff and attract new talent for developing businesses- more than this, if a business sits down and works through their scheme properly, they’ll likely find that the set-up could compliment their business model quite well.
It’s too easy for businesses to simply sign up for the most well marketed system, or the one with the lowest charges when actually they might be better off looking at different elements. A company with half a dozen employees might not want to hire a specialist just to manage the pensions for example, so could benefit from signing to a master trust that charges slightly more but offers a HR and payroll service so that the auto-enrolment is outsourced.
Speak to a lot of business owners about pensions though, and many of them seize up. “It’s not their area” they say, but if they really don’t understand pensions how likely are they to shop around once it comes to auto-enrolment, and how likely are they to consider those different elements? The odds are that many companies will simply set up a scheme with the first trust that becomes available with very little confidence that the set-up is right for them or their employees. Is this surprising though?
We know that pensions tend to scare people, make one wrong move and you could be placing the savings of your entire workforce at a disadvantage. Yet similar accountabilities could be said for areas like tax, or health and safety. Don’t pay your share of tax and you risk fines, PR issues, and even prison time. So why is tax more readily discussed than pensions?
Of course, nobody is saying that these people are experts in tax, but they know where to go for advice (HMRC), and how to shop around for an accountant or advisor if need be, it’s even been made easier to contact HMRC after feedback that enquiries were being left unanswered. That’s the kind of confidence that it would be great to see in pensions, and what I believe is the next step forward. You don’t need to be a specialist to understand when an issue becomes a problem.
When I have a problem with my internet access, I know that that is a problem, I don’t know what’s causing the problem, but I know to call my service provider who I can then trust to resolve the issue. From the provider’s perspective this kind of interaction helps because if a thousand people all have the same issue, then a link could be found to help improve the service (perhaps it was poor quality equipment) and therefore the marketability of the company also improves.
What if a trust is spending thousands of pounds on an initiative aimed at making the system easier, when in actual fact it’s making things worse? Of course there are plenty of professionals who are qualified to assess whether or not an approach is likely to work, but in reality this is speculation at best and only the end user can offer the most insight. We need individuals to build their confidence so that they can give us that feedback.
The difference between these tax, internet access, and pensions though is education. Internet access is familiar to most of the UK, particularly my own generation who have grown up with it and watched how our parents have resolved any issues. Taxes are admittedly a little different, and the confidence people have in that area likely comes from the support that they’re offered, support that isn’t currently available for pensions.
Being an entrepreneur is a cool thing, look at Richard Branson- the guy is akin a rock god! The career path is reasonably popular and it’s widely understood that increasing the number of successful businesses creates jobs, in turn enhancing the economy.
To help individuals develop their ambition, several organisations have been set up. Some of these have been brought in with government support, and some without, but each are designed to guide aspiring entrepreneurs through their responsibilities. Bootcamps, accelerators, incubators, and Business Hubs (as examples), have all been set up in aid of helping start-ups with developing their businesses, from paying taxes through to designing apps, virtually every area is advised upon… except pensions.
I argue that this is a generational issue, unlike in the case of internet access where my own generation were able to learn from our parents how to deal with any faults, even experienced entrepreneurs who are trying to encourage and support today’s start-ups lack confidence in pensions.
While they know where to go for support in other areas, it’s not exactly clear where to go for pensions advice. Is it something to discuss with TPAS? MA? CAB? An IFA? And what are all those acronyms about anyway?
There is unfortunately such a thing as having too many options, and particularly without one clear advisor to go to first, it’s easy to see why people struggle to build their confidence in their understanding. Business owners want to focus on growing their company, not waiting on hold to be told that they’d be better off speaking to another organisation.
I argue that having a culture of pensions education will benefit us all, but we need to first build that inertia. I believe that the most effective approach to getting the ball rolling is by working alongside the incoming generation who will be able to integrate this culture into the infrastructure of their businesses from the very beginning. This seems counter-intuitive, why work with people with so little experience?
Because start-ups with so little experience will be more likely to be in the habit of educating themselves and finding opportunities to gain experience in areas that might not be directly related to their own products. I’m talking about educating companies on pensions at the same time as they are educated on elements such as tax, and ideally through the same platforms.
There’s been a lot of discussion about who should deliver pension education, but there are already companies out there trying to deliver it: the Pension PlayPen, First Actuarial, The PlanB Partnership to name a few. I believe that these companies are delivering the right kind of information, however not every company is privy to this kind of development as Matthew Draycot, Business Development Director at Arcadia Recruitment, and Educator explains: “there’s bags of information but it isn’t all particularly clear/ well organised”. I agree with Matt and I believe that the assistance could be delivered more efficiently if the right kind of platform is utilised.
As I mentioned earlier, the education is likely to be most effectively delivered if presented not only at the same time as education within other areas, but also through the same platform. I believe that the Accelerators, Business Hubs, Incubators, and similar organisations would present a fantastic opportunity to gather this inertia, and that the integration would offer mutual benefits.
For example, Incubators are organisations that provide services and sometimes finance in exchange for equity (there are variations, but this is a typical arrangement). While the financial value is of course attractive, the real benefit is often seen to be the non-financial benefits. Many incubators provide office space and utilities, as well as the opportunity to learn from others with more experience. The duration of Incubator programmes differs but can range from around 12 weeks and 12 months.
The programmes often include workshops covering areas such as PR, legal topics, and HR, making this a great time to deliver a pension workshop, because this is when business owners are actively going out of their way to learn about issues outside their usual area of expertise. Companies are also often evaluated for their viability as part of these programmes, this again is an area in which we could provide support as auto-enrolment will change the cost of overheads.
Importantly, one of the biggest advantages that accelerators are thought to offer is the opportunity to learn from other entrepreneurs with more experience.
Mark Hales, a serial entrepreneur and key player in the Oxygen accelerator believes that the level of experience available is much more advanced that what has been available before: “When I took over a small business back in 1999, the best advice I could get was from the Business Link guy, who’d never run a business in his life and wasn’t able to offer that much help”.
This brings us back to the way my generation have learnt about faulty internet connections, entrepreneurs are now consciously learning from the preceding generations. If we can build up the confidence of today’s start-ups, we’ll also be investing in the confidence of those in the future, not only that but I argue that word of mouth act even quicker than that spreading word of the benefits within the current generation, not only employers but also employees.
Acting sooner rather than later will have the greatest effect, every employer will have to have an auto-enrolment scheme available by the end of 2017, it’s going to be mandatory, but some of the smaller companies (<30 employees) will already be required to set up schemes from October next year.
This gives us just over a year to spread word and develop confidence, it also provides at least one cycle of even the longest accelerator programmes. Auto-enrolment is quickly becoming a fundamental part of running a business, and with the right approach we can help these organisations to stay up to date and deliver the right level of education.