I’m fond of our current pension minister; he makes me laugh! He does a good impression of the “pension’s idiot” and enjoys being thought rather less on the ball than he actually is.
But scratch the surface and you’ll find that Richard Harrington “gets it”. I’m not saying that he’s a geek like Webb or a media guru like Altmann, I’m saying that he understands the difficulty people have saving a worthwhile pension.
Harrington knows about money
He’s a businessman and he’s bought and sold businesses in his time as a hotelier. At least one of those businesses had a pension attached and though he doesn’t bring this to his work, I understand Harrington had to deal with pensions issues as a sponsor. It is a lot easier to understand the difficult problems surrounding BHS, Tata and the multitude of struggling small pension schemes, if you’ve had business experience.
Being a businessmen makes you practical and realistic. If the Transfer value on a £10,000 pa DB pension is £400,000, what makes us think that the cost of providing an equivalent pension from a DC pot, isn’t at least £400,000?
So when Harrington told Citywire last week that he wanted workplace pensions to be providing the average saver with a £10,000 pa boost to their state pension , his estimate that they’d need to have a DC pot of £250,0o00 was perhaps low-side. £250,000 should (using the discredited 4% rule of thumb, give you £10,000 pa , in extra retirement income).
Aviva have produced a little table for Citywire which show some projections.
What the table shows is that projections like this depend on so many moving parts that they are totally unreliable. For instance NEST, over the past 3 years has produced a return of 10% above inflation, Scottish Widows last year produced a return 20% above inflation! Any kind of return above the 2.5% above inflation (real) – illustrated, would substantially boost the “total saved”
For instance, we know that a 0.5% difference in an annual management charge makes a 15% difference in pension outcomes over a life of a plan. so if the AMC shown on the projections above was reduced to 0.25% (achieved by a lot of large DC schemes) then you could bump up those bottom-line figures by between £10,000 and £20,000.
I am not wanting to discredit Aviva’s numbers, but I wouldn’t like people to draw the conclusion that the article makes
To reach Harrington’s target, an individual whose salary builds up to £27,000 over their career and saves for 40 years with no breaks would need combined employee and employer contribution levels of 25%. This would get them to a pot of just over £230,000.
Harrington knows that if employers and staff were able to afford 25% contributions, we would still be accruing DB benefits.
Setting realistic savings targets
What Harrington actually says to City wire is very revealing and very good.
‘It is very clear to me that, for people starting work today, that has to be their objective….. every day I think of that figure [£200,000 to £250,000] in the morning and it is not a bad way of trying to decide policies’
We cannot go on thinking that having a DC pot of around £35,000 is going to make a material difference to people’s standard of living in retirement. If DB schemes hold up to £400,000 to pay £10,000 pa , we need to think of £250,000 as a low side pot value to boos incomes by £10k.
Harrington is showing us that we need to think of our pension pot , rather as we do the value of our house.
Every little helps; pension governance give that little extra.
Clearly 8% of band earnings (£6-45k) is not going to get this type of pot – at least if your’re someone on average earnings. “Average earners” are going to have to save more through greater earnings, a greater proportion of earnings saved or by vastly increasing the efficiency of the savings mechanism.
Increasing national wages is something we have been pretty poor at over the past ten years, a national workplace savings habit is in its infancy, perhaps the easiest win is to focus on the savings vehicles. Bringing overall costs down, driving the real returns up and ensuring that people are invested in assets that can grow in real terms – are the easy wins.
We are used to hearing insurers talking about the need to save more, I want insurers to be able to show they are making those savings work harder. The job of the IGC is to make sure people get the maximum value for money from their savings products. That is why they are so important. We are now only a few weeks till they start reporting on what has happened to our savings over the past year. I am waiting!
Harrington needs to make pension governance a high priority, it is something he can do something about.
The little the Minister can do
Harrington is a businessman, he is practical and realistic. This is a £250,000 problem and it isn’t going to be solved easily. The next step in getting to £250k is for people to absorb the increases in AE saving (1 to 5% of that band), over the next few years.
Beyond that, we need to see some real growth in world economies driving investment returns, we need real wages to increase faster than inflation, we need interest rates to rise and we need the cost of saving to fall. Of these, the only factor that is reasonably controllable for Richard Harrington- is the cost of saving.
For our country to agree to spend less on today and more on tomorrow will demand a change in behaviours which is beyond the practical and realistic scope of a business minded Pensions Minister.
However, rather than duck the issue, Harrington is being realistic. We need to think of our pension pots being rather larger than a house. The average price of a house is around £300k. For most people the pension pot is struggling to get beyond the average value of a car.
Let’s be practical and realistic, which would you rather live in – a house or a car?
You can read the original article referred to in this blog here