KISS – the way for pensions to work.

KISS

Simple messages are often the most  effective.

When I started selling “saving” I was in my early twenties and I sold to my peers, those in London fresh out of college and struggling to get started in their careers.

My simple message was that

“if you divert 5-10% of what you earn into savings , your regular contributions will build into a “capital reservoir” from which you can draw to pay for your house deposit, the cost of children and  the things you wanted in retirement”.

What was more, working on the principle that money makes money, once you had the capital, your wealth would expand so that the capital reservoir was “huge” (though the exact adjective became a source of some fun among my sales team).

Kiss 3

Over thirty years later, this message remains attractive to youngsters, based on some important sub-messages

  1. The  amount you save is taken from salary, what you don’t see, you don’t miss
  2. There is flexibility to change the level of saving if needed
  3. Investment decisions don’t need to be taken till later (when the capital reservoir’s in place).

What I was selling was a workplace pension plan without the tax advantages or low charges or any sensible investment strategy (we simply talked of managed funds).

And yet this message was hugely attractive to my peers.

Kiss 4


The saving majority

Time has moved on but young people haven’t. Young people are the least likely to opt-out of auto-enrolment despite of many good reasons to do so. Why so?

  • Many young people are saving in the teeth of debt they’ve accumulated at college
  • They are saving into illiquid savings vehicles despite needing all the cash they can to get on the housing ladder
  • They are aware of many alternatives to workplace pensions which seem to be designed with them in mind – the LISA being only one of a long line of savings products rivalling pensions.

The more you think about it, the less sensible it seems for young people to save into pensions and yet over 97% of young people, given the opportunity – do.

At the ILC 2nd retirement summit yesterday, the opening session was a panel debate between five young women who professed either not to save, or gave very  good excuses for their peers not to save for retirement.

Despite this, I believe these people unrepresentative of their generation, having the financial sophistication to choose to be self-employed, (voluntarily) unemployed and (in one case) on a crusade against debt.

These were the outliers from the saving majority who proved to me that being a financial journalist/research fellow or IFA is likely to turn you off rather than on to pension saving!

KISS 2


You can think too much

Saving, like going to the toilet and washing your hands, is an activity of daily living for most of us. We like to think of ourselves as money saving experts and take pride in not spending money on tat while participating in financial weight-watching.

Auto-enrolment taps into this well of good-will towards financial prudence which is latent in the young. I suspect that it is because young people do not know what can go wrong, that they are so optimistic about that capital reservoir.

By comparison, the highest level of opt-outs are among those over 50 who think about pensions as “not for them”. There are good reasons why they should.

If I look back at the personal savings I made in my twenties, they are scarcely worth more than I put in. The charges (well over 5% pa on my plans with Target, General Portfolio and Allied Dunbar) have miserably failed to deliver on the promises from the statutory money purchase illustrations (which showed a return of 13 and 8.5% after charges). Many of us over 50s are opting out on the basis of not wishing to get bitten twice.

And many people look at their savings careers and despair. The pensions industry bandies about figures such as 15% pa as a proper saving rate and people of my generation wince. For virtually none of my career have i been able to save 15% of what I earn and even with the help of an employer contribution, there have been substantial fallow times in the last 30 years when I have not been saving enough. There comes a time in the affairs of older people when “not enough is enough” and the thought of playing catch up becomes so overwhelming that “give up” is the only emotionally satisfying option.

Some of those over 50 may have given up saving because it is no longer tax advantageous for them to save, but most (and the stats bare this out) give up out of a sense of savings despair).

You can think too much, experience can be your worst enemy. Thinking too much and opting-out of an employer contribution into a good workplace pension is financial vandalism, but I can see how it happens.

Kiss 5


The policy point

At yesterday’s conference were plenty of policy wonks , including a bunch of former MPs, current Baronesses and a smattering of senior civil servants and regulators.

These are people who have to work hard to empathise with the ideas in this blog, mainly because they spend much of their careers being looked after by tax-payer or corporate funded define benefit pension plans.

For all the noise about freedoms and LISA and other distractions, the central point is that if you don’t save between 5-10% pa of your earnings over your lifetime, you will not get the capital reservoir you will need in later life.

What we have got right since the Turner Commission is the simple means for people to save from salary. What we have not yet got right, is the level of saving which will need to auto escalate from 1% to 5-10% (with a healthy kicker from the employer on top).

But the basic features of workplace pensions are exactly what I was selling in the mid eighties.

  1. The  amount you save is taken from salary, what you don’t see, you don’t miss
  2. There is flexibility to change the level of saving if needed
  3. Investment decisions don’t need to be taken till later (when the capital reservoir’s in place).

Keep it simple stupid (KISS)

The Kiss acronym has stayed with me since I was taught it on my 1984 sales induction. It is for product designers and politicians to create the products and incentives to attract sophisticated money to pensions. For average working people , points 1,2 and 3 are quite enough.

But there is a fourth and most important feature of what we do, which is critical to what we do – and that is trust. Young people trust the system to take care of them and that trust is lost over time unless promises are not kept.

I work hard to restore that trust among the peers with whom I work. Many of them are now in their mid 50s like me and have given up on pensions. It is a lot harder to win trust back than to keep it.

Listening to the great and the good yesterday, I realised how incredibly simple it is to make auto-enrolment. We simply need to make it easy for people to do 1-2-3 and keep people’s trust.

Keeping it simple – however – is a lot harder than it sounds.

KISS

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to KISS – the way for pensions to work.

  1. ancientllm says:

    I suspect the mistake most young people make, certainly those leaving uni, is to think they must have money to pay for the things that the adults they now are, have. Instead of realising they are suddenly going to have a massive increase in net income so that they won’t notice losing 10%, even 20% of it. And once you start doing that you don’t notice it as your life goes on. But get to 30+ and suddenly realise you need to lose 20% of your salary to pay for your survival in your later years is a different matter altogether! Regards, Rob

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