I don’t often think I know more than the Institute of Fiscal Studies on a question about money, but this morning I’m pulling rank. I got sent a copy of Jonathan Cribb and Laurence’ O’Brien’s paper yesterday and was non-plussed.
Ask anyone who has sold the idea of saving or saving more into a private pension, the question in this title and you should get better insights. 20 years ago, people were still selling this idea and getting paid to do so – from the funds of the people they sold to. The system of commission was supposed to align the interests of adviser (aka salesperson) with the client (aka consumer) so you got paid a percentage of the first 12-24 months increase in contribution and in return, the client accepted a charge on their fund which was levied over its lifetime.
So salespeople went out and sold pensions and pension increases to people who were or became their clients and if you couldn’t get paid a commission, you found a product that did broadly the same thing (like an FSAVC).
We like to think today that people are able to flex their workplace pension contributions using technology which tells payroll what they want deducted and whether the deduction is exchanged for salary. State of the art administration systems do this, but many people are only to make additional contributions to their pensions by applying to make or increase an AVC offered by their employer, occasionally they can buy added years but that activity is mainly confined to the state pension.
The motivation for making changes to pension savings is that gut-retching guilt that you know you should (we all do) but in practice, we only press the button to save when occasion presents itself. And that means our being sold the idea and it means executing the idea is simple enough that it is almost done for us. We politely call this a “nudge”, it is infact an opportunistic sales pitch – only a lot less clumsy than what I did when I “advised” people to spend more on their later life.
The IFS’ conclude that increased tax incentives, pay rises or “trigger ages” do little to change the amount people choose to pay into pensions. What makes a difference is someone showing you how to make extra contributions by doing nothing – aka auto enrolment/escalation etc. Any pension salesman could have told them that. I’ll tell you this for nothing!
All you have to do is nothing.
“All you have to do is nothing” arrangements are very popular with staff because there is this collective guilt among us that we are not saving enough and that our employer has probably got us a better deal than we could get ourselves.
Employers who put the contributions requirements to auto-enrolment higher than the bare minimum
With basic AE you pay 4% of a band of earnings and get 1% as an incentive plus 3% from your employers
generally find their opt-out rates are no higher than if they stuck at the minimum. Marks & Spencer when they widened participation in its DC scheme in 2012, auto-enrolled above the 4% minimum and found their opt-outs were equivalent to rivals which hadn’t.
There is considerable resilience in most people’s attitude to take home. We know that our take home can go down as well as up – we know that taxes go up faster than our pay. We think of a pension deduction as any other deduction as a tax on our current spending. We accept these deductions grudgingly but ultimately we feel happier about paying for our future wellbeing than for a lot of other things.
“All you have to do is nothing” pension increases are the ones that work best.
When required to choose.
When I was selling a pension or a pension increase to a customer , my chief sales tools were a pre-populated application form and a direct debiting mandate. I found that the resistance to paying a first premium by cheque was higher than simply signing a DD and giving me bank details. That’s nudge theory at its most basic – having to find a cheque book was a barrier to a sale.
When it came to how much to save I found a heuristic worked best.
Do you have the amount you want to save or would you like to know a way of working it out?
“The earlier you start the better now there’s an old rule of thumb and it scares everyone so don’t take it too seriously but it’s a good example.
“If you’re 27, half 27 is 13.5. So if you hadn’t started a pension and you started it now, you would want to put in 13.5% of your salary for the rest of your life to have a good retirement.
“Now that includes any employer’s contributions, no one ever gets near this.
“But the real reason to point that out is age. If you started at 60 you’d be putting in 30% of the salary for the rest of your life.
You may find this a little familiar, that’s because you may have heard Martin Lewis say this on the Pension Special of his Money Saving Expert Show.
It’s exactly what I used to say to my clients, but with a sales “close”
Let’s draw a line between what you are saving now and what the rule of thumb tells us.
At one end of the pencil line was £0 – at the other end was earnings x formula
The vast majority will decide on a contribution level slightly higher than the other.
In this case – the rule of thumb said £500, the current level of saving was £0 – a typical answer would be £300.
You can soften the blow with tax and NI savings and existing personal contributions and employer contributions but this is the kind of simple way to help people who have to choose – to choose.
We had simple ways to avoid people getting stuck on questions like “where do I invest”, do contributions go up each year” and so on.
We wonder why it is that self-employed pension savings have fallen off a cliff in the past 20 years. The simple answer is that nobody is selling contributions simply – apart from Martin Lewis (who should be reminded that Nest offers better VFM for the self-employed than “stakeholder pensions “!)
When and why do employees change their pension contributions?
We can dress things up as “financial well-being” or “workplace financial education”, but what most people anticipate is that their pension contributions, set as a percentage of salary, go up or down with salary and that is the end of it.
For those who want to spend more of their salary on their retirement , a simple way to work out how much more is helpful – see above. For the rest, less is more. Unless someone wants to take control of their savings, then defaults are enough (the equivalent of the pre-populated application form)
Is this “simplified advice”. I wish it was! I wish that MaPS and Pension Wise were used as Martin Lewis used Charlotte Jackson on Tuesday – to explain pensions in such a simple way that people felt confident to take decisions based on rules of thumb.
Because the alternative to taking a decision, is to do nothing, which is what most people who are not auto-enrolled, are doing about retirement saving right now!
Unless we can get back to some old-skool thinking – like Martin’s.
