Sometimes pension specialists need reminding of what matters to non specialists-what we call (with some embarrassment) “real people”. That’s what Steve Webb did on Thursday, speaking to around 250 PMI members assembled virtually and in person in the City.
This blog is about what Webb said , with some comments of my own at the end.
The three key insights of Webb’s keynote were
- Its pensions that matter most, especially the state pension
- The pension taxation system is irrelevant to most people
- Employers aren’t paying enough on our behalves to make workplace pensions matter in the real world.
1. In the real world – it’s the state pension that matters
It is a salutary lesson for those of us who consider pensions in terms of savings rates, engagement and investment pathways that the impact of personal pensions on our retirement income is no more than the little pink wedge (for men ) and the little pink slither (for women).
The pensions we enjoy from our work, amount to little more than a quarter of our retirement income which is still dominated by the state pension.
Of the orange wedge (workplace pensions) , ONS 2020 data tells us that of 20.2m employees in pensions , approximately 7.4m people have DB pension rights, these are overwhelmingly public sector. The largest private sector pension (USS) is providing pensions to University lecturers, many of the large private sector pensions (typically anything with British in its name), originated from the public sector.
Master trust DC pensions, the principal beneficiary of auto-enrolment hardly move the dial (yet).
2. In the real world – tax relief limits are largely irrelevant
- According to HMRC, “95% of savers approaching retirement are currently unaffected” by the LTA
- As for Annual Allowance charges, in 2018/19:
- only 13,660 charges were reported via ‘accounting for tax’ returns by schemes
- only 34,220 people reported contributions over AA via self-assessment
In that year there were 31,600,000 taxpayers!
- Most people don’t earn £40k per year, still less put that much in a pension!
In Steve Webb’s analysis, one limit which does matter to ordinary people is MPAA which needs reform
3. In the real world most people aren’t paid for a proper pension
Steve Webb’s real world exposé showed that most people pay minimum AE contributions, which are even lower than we think
While 7.4m of us are in DB, of the remaining 12.8m in DC out of which only 3.5m pay more than 5% of total earnings. A staggering 9.3m of savers pay under 5% of whom 1.7m are overpaying their pensions by 25% due to the net pay anomaly.
The latest occupational pension schemes survey (2018) suggests average contribution rates in private sector DC of less than 2.7% by members and less than 2.4% by employers
These alarming statistics are based on recasting the auto-enrolment minima as a percentage of total earnings rather than AE band earnings.
What needs to be done (the Webb blueprint)
Steve Webb , (like John Hutton a generation before) , is capable of seeing the big picture without lapsing into high fallutin’ macro-economic jargon. Like Paul Johnson, he makes policy initiatives look sensible and achievable.
Here are his conclusions as to what needs to be done and done better (my comments are in italics , what remains is taken from Webb’s PMI speech.
- Policy makers / media focus too much on the top 10% of earners.
- It’s not surprising they do, most of us struggle against the myopia of being in a “high earning bubble”.
- Key issues for mass market
- The State pension has been improved but more is to be done
- Accumulation is a “work in progress” – contributions are key to making workplace pensions more than a thin male wedge or female slither. Self-employed pension contributions are actually falling.
- “Decumulation” has much further to go – workplace pensions do not pay pensions
- “Give me defaults over engagement any day”! – Steve Webb’s final remark
Those final two bullets, point to work I talked about last weekend. Along with Phil Boyle, Steve Webb has initiated work on a mass market decumulation model which builds in behavioral bias’ based on “happiness” factors – what economists call “utility”.
I’m pretty sure that Lamborghinis score pretty low on Steve Webb’s happiness factors.
In Steve Webb’s real world, people do not take pension statements down the pub, infact they don’t do much with pension statements at all.
Words and phrases such as “education” and “financial wellbeing” come a distant second to products that work. The products that are working in the real world are the state pension and what remains of workplace DB, the rest is a “work in progress”.
Webb talks of strong defaults as the next step for those using their pension freedoms, but the pragmatist that he is, knows full well we need good default product more than “pension engagement”.
Pensions for the 90%;- wealth management for the 10%.
Listening to Steve Webb was a salutary lesson. Real world pension economics is a far-cry from the wealth management agenda that so dominates the policy makers and media focus. Most of what we discuss in terms of tax reform is an irrelevance and most of what can be done to improve member outcomes is to increase the proportion of our earnings being diverted to funding our futures.
Where Webb differs from the current minister is in his grounding in real world issues, something he attributes to his work as a pension agony uncle for the Daily and Sunday Mail.
But I think Webb’s difference from the current pensions minister goes deeper than that. His interest in the issues that those on benefits have with workplace pensions, his campaigning for restitution of unpaid state pensions and his insistence on his former department dealing with tax anomalies such as “net pay” and “child benefit inequalities”, mark him as a man who thinks of what really matters in the real world.
While Webb’s real world is disinterested in the major concerns of the current minister (the investment big bang), it is the world of the people who click the turnstiles at the Hawthornes and only see Lamborghinis on the TV. It is a world that thinks of pensions as pensions and not as wealth.
Neither of which will give you as much happiness right now as clicking through to Pete Shelley’s alternative Real World.