Altmann hits out at providers for pension positivity failure https://t.co/5PsvkK6XnS via @profpensions
— Ros Altmann (@rosaltmann) December 30, 2022
Ros Altmann is hitting out at workplace pension providers for not selling the benefits of pension saving hard enough. This is in the light of research by the PMI that suggests that a lot more people have opted out of workplace pensions or cut back their level savings , than had previously been thought.
I disagree with her analysis which is right in detail but misses the central point that most people make decisions on workplace pension contributions in conjunction with their employers, providers have very little say in how savers behave.
Employers have the crucial role (whether we like it or not)
There are a few cold economic facts that need to be digested before we follow her down that rabbit hole
- Participation rates in workplace pensions are the responsibility of employers as much as, if not more than , the workplace schemes into which people save.
- It is not in the financial (though it may be in the economic) interest of an employer to have high participation rates.
- The immediate productivity of staff is more likely impacted by current than future solvency
- Employers cannot encourage staff to leave workplace schemes , but they manage the means for people to stop paying (via payroll).
The personal bond between an employee and the workplace pension is likely to be minimal, especially if the employee is young and not in the habit of checking balances or amount accrued. Most young people do not differentiate between a basic auto-enrolment scheme (where the employer contribution is probably lower than the cost to the employee of staying in it) and a high-quality DB plan. Opt-out rates among nurses from the NHS plan are some of the highest reported and nurses are opting out because they stay they cannot afford to stay in. Can we blame the NHS pension scheme for this?
The grim reality is that the cost of participation in many good pension schemes is too high, and a lot of this is to do with the fact that low-earners do not get their contributions incentivised (if in a net-pay scheme). Incidentally the NHS pension – like all public sector pensions, operates on a net-pay basis.
The financial benefit to the NHS of nurses’ opt-outs is immediate and important to a service that is struggling. The economic loss of non-accrual will be felt by the country in maybe thirty years time. Go figure!
As for workplace pensions, the financial argument used by Ros is based on the cost of participation being a lot less than supposed. The increase in monthly take-home caused by leaving a scheme where the employee pays 4% of band earnings , the Government 1% and the the employer 3% is unlikely to be that great.
John may get a little more if his contributions are paid by salary exchange and if the employer chooses to share the NI savings but this equation is unlikely to be particularly compelling if
- John knows he can get back into the scheme in the future
- John is facing bills he could not otherwise pay
John’s unlikely to listen to financial arguments around the tax, national insurance, universal credit or other means tested benefits if he is worried stiff about his bills. The most pressing question he has on pensions is “can I stop?”.
He will not be asking that question of the provider, he will be asking that question of payroll and it is with payroll that the questions about the advisability of stopping should rest.
We are blessed with a brilliant payroll industry in this country, payroll specialists know not just about payroll deductions but about pensions and about benefits. They are an early warning system for employers keen to understand the financial wellbeing of staff. When people opt-out of pensions, employers find out through payroll.
If any of my staff opt-out of our workplace pension , I want to know why. Alarm bells will be ringing for me as an employer and I will make it my business to know if my staff member is ok , not just because of personal affection but because productivity and financial well-being are inter-linked.
Ros Altmann, is right to conclude that workplace pension providers have been doing too little to sing the praises of their schemes and even after a dreadful 2022, our workplace pension schemes are still delivering excellent returns well in excess of any other savings vehicles. She is right too to argue that they could be better promoting the affordability of membership through targeted communications.
But when it comes to the issues that ordinary people have participating in a workplace pension, whether that is the NHS scheme or Nest, the pension provider is in a poor position to help. The conversation is going on elsewhere.
Employers (and providers) wanting chapter and verse on the affordability of workplace pension contributions can find detailed analysis here from the Low Incomes Tax Reform Group
For a detailed article on how employer and employee pension contributions impact entitlements to universal credit and specific benefits , follow this link.
HMRC data shows 34 million people in the UK are projected to pay income tax in 2022/23. That is 63% of the estimated 54 million people aged 16 and over, according to Office for National Statistics (ONS) population figures for mid 2020 – meaning 37% of adults will not pay tax.Sep 6, 2022
I doubt this this group can save enough to have income beyond work they also may have less than 100% NI contribution so need to rely on a State pension that at best gives 30% of a living wage.
This group must depend upon the generosity of those paying tax to dignify their retirement
The rest would be well advised to have a regulated adviser to plan for the Rich/comfortable/poor outcomes for income beyond work
Collective schemes would seem to have taken away the responsibly to provide the basics at level one of Maslow objectives Ignorance and denial has its price
Collectives have a disgraceful record of failure to deliver on promises but they do facilitate unqualified advisers to operate and people like train drivers to lie about their total remuneration package.
It would help the development of a solution if the segments of the market had appropriate solutions for their segment
DC is the most transparent option It may be harder to sell as it does not absolve the beneficiary from personal responsibility. It is the truth
Back in the states, my experience is that the best solution is an individual account retirement savings plan (401k, 403b, 457, etc.) that couples perennially-applied automatic features with “liquidity without leakage along the way to and throughout retirement.”
My experience is that workers undervalue the defined benefit pension. Unsurprisingly, defined benefit pension plan sponsors are less willing to commit to a plan where it is undervalued. As one of my Chief Legal Officer’s once said, when I confirmed that workers were not all that enthralled with the DB pension we offered, “perhaps we should survey retirees.”
The coupling of perennially applied automatic features with tax-preferred “liquidity without leakage” recognizes that voluntary enrollment is insufficient for those living paycheck to paycheck, who are often in debt. It also recognizes that individuals will prioritize current needs and requirements over those like retirement, which are distant, uncertain and perhaps even unlikely.