What can workplace pensions do to help?

A recent announcement from 15 large workplace pension plans explained that £1m was on the table to improve awareness of the advantages of saving for retirement through a workplace pension.

But nothing was mentioned of the outcomes of these savings and whether they provided an adequate income for the 41.5m customers of the 15 providers. Between them

Can workplace pensions help their  customers claim the missing £16bn, £1.8bn of which is unclaimed from pension credit?

NEST has been established with a public service obligation (PSO) to accept any employer, of any size, which wants to use the scheme for the purposes of meeting their duties. This means that every single employer is able to enrol their eligible workers into a qualifying pension scheme.

It’s public service obligation does not stretch to nudging its poorer customers towards benefits such as universal and pension credit, but it has voluntarily set up Nest Insight. Nest Insight is a public-benefit research and innovation centre whose mission is to find ways to support low- and moderate-income workers to be financially secure, both today and into retirement.

In his independent review of Nest, presented to the SOS and Pensions Minister late last year, David Bennett commented

The future role of Nest Insight is something that Nest, working with DWP, is recommended to consider. In particular, a review of the location, governance, branding and sources of funding of Nest Insight, including to establish whether it remains appropriate for Nest Insight to remain (part of) a public sector body.

In my view, Nest Insight needs to distance itself from the commercial interests of its commercial sponsors and focus on the outcomes of its member’s savings and in particular the ways that shortfalls between these outcomes and minimum income levels, can be made up.

The most obvious of these, considering Nest’s retirement age is aligned to state pension age and the qualification age for pension credit, is for Nest to consider its member’s take up of Pension Credit and gateway benefits.

The DWP are currently exploring ways to improve the take up of pension credit. Nest could be an integral part of this.  To be able to cover its operations until it has enough scale to be self-sufficient, the master trust receives an annual loan from the DWP that now stands at £884m, which compares with £778m in 2019-20. A part of this financing relates to the public service obligation.

It would be a good idea if Nest Insight, having access to Nest’s saver’s data, worked with the DWP to bring down the estimated 850,000 eligible claimants of Pension Credit, by nudging Nest members towards it.

Nest can provide some quick wins to Nest Insight.

1. Members with low contributions – these are likely low-earners with minimal savings and potentially low state pensions (especially if women)
2. Members with low pot values, as with (1) these are candidates for the pensions guarantee and savers guarantee from pensions credit.
3. Members 66 or over, these are likely to be eligible for Pension Credit today

After 10 years of investing, Nest has around 10 million members, about a quarter of the working population. Considering it targets low to medium earners, Nest is likely to have at least a quarter of those eligible but not claiming pension credit.

So if Nest can (with the help of Nest Insight) find likely candidates for pension credit, what can it do to get them to take it up?d

This brings me back to the work done by Salad Money and ScotCash CIC. The effectiveness of their help was that it was provided at a time when there was pre-engagement, in this case when a loan was being applied for.

The equivalent in the pension  world is the point at which people first apply to draw money out of their pension pots (technically “the crystallization event”). This trigger point (or life event) when people a) are sharing the data that is needed to make the benefits check; and b) are incentivised to follow up on the benefits application process.

The beginning of the decumulation phase is the best point to make a benefits check. If this happens when someone is not yet at pension age, then the benefit applied for is universal credit, if after, pension credit (though some people in mixed-age partnerships won’t get pension credit till their partner qualifies.

Often the first  withdrawal is made without thought to consequences and leads to unnecessary tax bills and unnecessary depletion of savings Software is now available to .  create a simple simulation that compares the impact of applying for pension credits vs withdrawing income from the pension pot. Software can also help people see if their drawdown  creates an income tax problem.

By embedding a simple benefit checker in the online or telephone application service ,  a responsible pension  like Nest can provide a painless intervention that could make a substantial improvement to the member’s retirement planning. Surely this is a good way to exercise the consumer duty?

For those workplace pension providers who are principally reporting to the FCA, providing a benefits checker prior to crystallisation  will help them  comply with the FCA guidance on the fair treatment of vulnerable customers, and  keep more assets on their books. But perhaps benefit checking has more marginal advantage where contributions and balances are higher (as is typically the case beyond a handful of major master trusts).

If Nest was to pilot, I would hope that Now, Smart, Cushon and Peoples would follow.

Towards automation

When I spoke on Money Box, Paul Lewis asked me what the private sector could do to improve Pension Credit take-up that the public sector couldn’t. I had three answers

1. The private sector has been through open banking which has spawned a number of fintechs, among them the provider of the software powering Salad Money and ScotCash CIC. That firm is Inbest who reached out to me after the show
2. The private sector, whether through banking , insurance or investment know a lot about their customers and are well placed to provide interventions as discussed above
3. There is considerable entrepreneurial zeal among us, not that this isn’t in the public sector too, but our zeal can be harnessed pro bono where the long-term win is a commercial advantage. I have to admit this is what drives me and I hope Inbest.

I’ve been asked by the Pensions Minister to scope the feasibility of automating pension credit (and by extension other benefits) through data capture. I don’t think we will be able to do this easily, assembling the APIs and permissions to use them, may take years. But I do think we can improve awareness, identify the likely eligible and make applications easier.

Properly integrated and sensitively promoted, benefits checking software can have remarkable impact.Including the “door to more” benefits that Pension Credit opens, Inbest’s data suggests massive monthly benefits from Pension Credit

based on Inbest claims

and Inbest reckon the claimable pot at £2.2bn, 15% higher than the DWP estimate

I am increasingly of a view that if the private sector helped, we could achieve the automation of pension credit within 5 years, that would be a huge win for our country and for our poorer pensioners.