Perhaps we are getting a little complacent about opt-outs?

The FT has published research showing that opt-outs from the NHS pension scheme are running at 5 times the rate of opt-outs from the Local Government Scheme. When I first read the article, I thought of a group of Harley Street consultants  I’d presented to in November, many of them had opted out of the NHS for tax reasons, they had issues with the annual allowance and lifetime allowance. Rich people’s problems don’t interest me that much -I’d talked with these people about investing in EIS, the person before me had gripped them with a presentation on how they could hang on to wealth in a divorce.

But opt-outs from rich doctors are only a part of the story.

Yes, higher pay and lower pension makes good sense for many people, we should support them not stand in their way https://t.co/MdFtiF3oRf

— Sam Pickford (@pickfos) December 29, 2018

It’s easy to sympathise with Oxleas who made an attempt to gain a competitive advantage over other NHS trusts by offering more now for less tomorrow.

But this is a very trappy argument. The NHS is Britain’s largest employer and the universality of its pension scheme has for generations held firm.  Allowing individual trusts to compete for labour on higher take home is deeply irresponsible if it means those on low incomes are deprived of later life benefits. The principle of pension solidarity is strong in the NHS. Oxleas didn’t run this campaign for long and for good reason.

Opting out on “affordability grounds” is bad news

There clearly is a point where people cannot afford to be a member of a pension scheme. If you want to follow the affordability argument through, here’s some data from a chap I haven’t come accross before – who’s talking a lot of sense on linked in.

He’s called Vinay Jayarami – here’s what he wrote on a post started by SteveWebb on the NHS opt-out issue.

Proof that we have an affordability problem – not just a savings problem

I read Adam Carolan‘s post “How to plan your income” on Medium. I really liked his simple yet effective approach, and felt it could help a great number of people live better futures.

It got me thinking — just how many people might such a framework apply to? So I did a bit of work.

I started with the £5,000 per month net income “straw man” Adam used. I went here to see what that might equate to in terms of pre-tax annual income. This is what I found.

So it would take a pre-tax annual income of £92,000 to create £5,000 per month in net income.

Then I asked myself, how many people in the U.K. have a pre-tax annual income of £92,000 or more? I went here to find the answer, and this is what I found.

So it turns out less than three people out of every 100 people in the U.K. have a pre-tax annual income of more than £92,000.

I do realise Adam used the £5,000 figure only as an example.

So I said, what does this look like for a median Millennial in the U.K.? I assumed a 30-year-old male, because I discovered here that a 30-year-old male is likely to earn more than a 30-year-old female. I used the median because I figured:

(1) this would make the analysis relevant to at least 50 of 100 people, instead of just 2–3 out of 100 people, and

(2) if I used the average (the “mean”) it may be skewed by people who are very high earners

Drawing from public sources of information on median income and median expenses by category, I used the Money Advice Service’s online Budget Planner and came up with this:

This confirmed my belief that for a vast majority of U.K. households, the problem isn’t just a savings problem, it is an affordability problem.

People aren’t (only) saving too little because of their behavioural habits, but for the most part they are saving too little because it turns out there simply isn’t enough left after they pay what’s due in Adam’s first bucket, “fixed costs”.

This problem cannot, in my opinion, be solved for most people by addressing the savings and budgeting side of the equation alone. Even if you look at the investing side, the problem remains, because if you cannot save, you cannot invest.

Clever approaches such as the one Adam describes (and I really like it) can help 2–3 people in a hundred (i.e. those in the top 2–3% of income) save more intelligently to provide for their future. But for the rest of us, I believe it needs a dramatically different solution.

That solution, in my opinion, requires a fundamental re-think of policy around these four key pillars:

(1) the individual or household

(2) the financial services industry

(3) the employer (in the case of those who are not self-employed), and

(4) the government

I will write about my view on this in more detail when I can. Until then, thank you to Adam Carolan for making me think.

Pricing pension contributions out

Here is Steve Webb commenting on Linked in.

The rate of opt outs from the NHS pension scheme is a real worry – and most workers may not realise quite how much they are giving up. I strongly suspect female employees in particular are jeopardising their retirement prospects.

Steve Webb hints that the victims of high contributions are those most vulnerable – low-paid females who have traditionally opted-out of  pensions. From the FT article, I suspect that the Royal London research cannot prove the link to high female opt-outs, but it is – more than probably – here is what Jo Cumbo actually reports

Royal London, a pension provider, has calculated the opt-out, or quit, rate for the NHS scheme is about 16 per cent, based on the 245,561 people who stopped saving into it between 2015 and 2017. This compares with an opt-out rate for other schemes of 3.4 per cent for teachers, 1.45 per cent for the civil service and 0.04 per cent for the armed forces, according to data obtained by Royal London through freedom of information request

I suspect that the 7-9% contribution rate is indeed jeopardising people’s retirement prospects – especially those who are finding budgeting a problem. More bad news is on its way as the Government Actuary demands a greater contribution from NHS employers to meet what it considers a greater strain on the national exchequer.

Something has to give and if it’s not HM Treasury – it has to be the total reward of the NHS employee, more of the reward will have to be paid to pensions, less to wages.

The only way out of this is a restructuring of the benefit basis of the scheme itself, something that would take years to achieve and would require some pretty robust negotiation. I am not sure we are at this stage yet.

A wake up call

The news of increased opt-out rates from the NHS pension scheme is a wake up call. As I started this article, so I’ll finish – perhaps we are becoming a little complacent, auto-enrolment cannot nudge people into personal insolvency (“Oh dear – you’re spending more than’s coming in”).

A scheme design with a 16% opt-out rate is a failing scheme . The cause of the failure may be under-promotion, deliberate action (see Oxleas) or just a badly designed scheme.

I hope that the work done by Royal London (and the promotion by the FT) will lead to employers, unions and those who manage the scheme itself, looking at this problem with some urgency.

If they want some ideas on how to kick off that debate, they should look at the debate on social media – which is posing some fundamental questions by way of an agenda.

I’ve never quite understood the obsession with getting members to contribute either. If an employer decides that pension is a worthwhile benefit then make it non-contributory. Members can top-up with their own contributions elsewhere or give them a scheme to do so if you want.

— Mark Rowlinson (@markjrowlinson) December 29, 2018