Thanks to Dave Thompson who sent me this random picture, presumably with a hope of an answer! I suspect its a teaser for Pensions Awareness Day – which is now just a fortnight away!
Well here goes Dave, I’m going to do some big picture philosophical stuff and ask some fundamental questions
“Who says I should save?”
“Should” suggests you have some kind of duty. In places like Australia, saving into a pension pot is compulsory, in others – like the UK where we have auto-enrolment- it is business as usual and in others – like America , it is a personal thing.
“Why do we Britains save?”
In 1998, I worked with Ben Jupp on a paper called “Reasonable Force”. It looked at the level of compulsion that the Government should apply to a nation recalcitrant in its savings habits. Ben argued then for a “target lifetime income” that went beyond the level of the Basic State Pension and was achieved through compulsory savings. His arguments were founded on political thinking.
Over a hundred years ago John Stuart Mill argued that ‘the only purpose for which power can be rightfully exercised over any other member of a civilised community, gainst his will, is to prevent harm to others. His own good, either physical or moral, is not sufficient warrant.”
This idea of saving to stop ourselves being a harm to others suggests that in Britain at least, we are engaged in a social enterprise that is designed to get everyone to a minimum level of personal solvency in retirement. That I suspect is what we think auto-enrolment is about.
We don’t like compulsory saving, we have – since the early days of company pensions – had a savings opt-out. The pension freedom is the freedom to spend our savings as we like. We are a liberal society that likes defaults but defends the rights of individuals to do what they like (even if that leads to self harm).
Is there wisdom in saving for the future?
As Victoria Derbyshire told her radio listeners, it’s easier for people to spend on retirement than save for it. We like a plan that has a purpose and for most of us, the purpose of saving for the future is as insurance rather than greed. We do not save to be rich – we spend on the future so that we are not poor.
Infact we are behaving as John Stuart Mill would have us behave, collectively agreeing not to be a burden on each other.
What is “enough”?
Ben Jupp wrote Reasonable Force at a time when the state pension was (in real terms) about 2/3 of the value it is today. He was – in 1998, writing at a time when our housing stock was a relatively low part of British wealth when we expected both inflation and markets to be measured in double digits. We also expected to be paying 10% + as mortgage interest.
What is interesting is that the details of Jupp’s solution-are based on very different financial conditions than we have today.
The State Pensions has moved a long way from the 10% of “male” average earnings. It is now three times that.
Practically, it suggests that: a target minimum income for pensioners should be 40 per cent of expected average male earnings, which currently would amount to £160 per week;
to achieve this level a basic state pension of 10 per cent of average male earnings should be guaranteed by the government, leaving individuals to fund a target minimum additional pension of 30 per cent of average full-time male earnings;
it is reasonable to require those with over half average male lifetime earnings to save the amount required to reach this target;
a compulsion rate of 11 per cent of current earnings should ensure that people earning over half average male lifetime earnings contribute enough to fund the target minimum pension;
once people had saved enough to ensure the target minimum pension they could stop paying into their fund if they wished; some people would reach the target in their forties, some in their fifties, some in their sixties, a few never at all without government help; to ensure low levels of contribution avoidance the government will have to win people’s hearts and minds about the need to save more and the need for a minimal compulsory system.
But the answer from today’s experts remains very similar to Ben’s. Here is the answer that Scottish Widows have come up with. For 11% read 12% – plus ca change.
How much should I save into my pension each month? Everyone wants to know how much is enough for a comfortable retirement and our Pension Expert Mags can help. #TakingOnYourFutureTogether #PAD19 #YourFutureSelf pic.twitter.com/n3tRF1tRFK
— Scottish Widows (@ScottishWidows) September 1, 2019
Savings system need popular support
Looking back, the idea of compulsory saving Jupp was recommending, was unworkable. It ignored the idea of “net disposable income” which we know to be lower for those in the mid-career than at outset or at the end of work. It came before “nudge” and the behavioural work that suggests that an opt-out coupled with re-enrolment is more likely to win popular support than the minimal compulsory system he suggested.
The success of auto-enrolment is that it commands popular support, its weakness is that it has yet to convince us that we are either saving enough – or that we know how to spend what we save as a replacement income.
These weaknesses need to be addressed as people will not go on saving for ever – without knowing how they are doing.
We need to know how we are doing
British savers are not stupid, they know what they don’t know and are anxious to remedy their ignorance.
I shy away from phrases like “financial education” which have a patronising feel to them. We don’t need education – we need information on which we can take informed decisions.
That means understanding how we have done, how we are doing and what we need to do. These are the “how much should I be saving” questions.
A pensions dashboard is needed. Not necessarily a national dashboard, but an individual dashboard which can be downloaded from the App Store and populated with real-time information from databases that keep records on what we have saved.
That is all we need – the data that tells us what we’ve got. But that is what is missing right now and the longer that we put off dealing with the problem of aggregating that data – the more likely people are to get frustrated.
Wisdom in saving?
There is wisdom in saving, but if we are wise enough to save, we need to be rewarded. Right now we are saving into what many of us consider to be black boxes to which we have no keys.
There is currently £21bn of lost pensions savings floating around in asset pools managed by organisations who have lost contact with their customers. The DWP estimate that by 2050 there will be 50 million lost pension pots.
People will – if they cannot find their money – cannot find out what they’ve saved and cannot spend their savings – very quickly question the wisdom of saving.
That is the number one pensions challenge facing Government and it’s one I am far from convinced – we are properly facing.
You can support Dave and the Scottish Widows team as they make their way around the country on the Scottish Widows pensions bus
The Scottish Widow is here to help launch our Taking on Your Future Together Tour. Come along to @westquay Southampton today for free pension guidance and you can meet #YourFutureSelf @dailyecho @visitsoton #PAD19 #TakingOnYourFutureTogether pic.twitter.com/5a1aAeeMPI
— Scottish Widows (@ScottishWidows) August 31, 2019
You can also support the Pensions Geeks who are also on the road!
So excited to announce our Pension Awareness Tour locations! Come along to get your pension questions answered & receive some fun giveaways. Visit our website for more info #PAD19 #pensions #questions #retirement #future pic.twitter.com/uc6SDao67D
— Pension Awareness Day (@PensionDay) August 25, 2019
How much should I save into my pension each month? Everyone wants to know how much is enough for a comfortable retirement and our Pension Expert Mags can help. #TakingOnYourFutureTogether #PAD19 #YourFutureSelf pic.twitter.com/n3tRF1tRFK— Scottish Widows (@ScottishWidows) September 1, 2019