I’m amazed that the news that we aren’t paying enough into our “pension” is a surprise. This report may have been a “labour of love” but it doesn’t “amaze”. The title of Pension UK’s report is
Closing the gaps: Can flexible contributions make retirement savings more affordable?
I know that the amount that companies with defined benefit pension schemes have put away well over twice the auto-enrolment minimum, most for many decades.I know the transfers members of DC plans have been substantial and have been most popular, right to the end of 2022.
It doesn’t seem to be surprising that with the amount of money that goes in, the amount coming out of a new workplace pension funded typically at 8% of a reduced band of earnings is not going to give as good a pension as one with twice the amount going in.
It is obvious that defined benefit schemes were offered by only a small proportion of the employers in this country .With the introduction of Auto Enrolment came a much more onerous obligation of employers who till then had made no contributions at all. This started low and increased over the period to 2018 to enable companies to adjust to the increased obligations of funding pensions.
Nicky Day promotes work by Jackie Wells sponsored by a number of workplace pension providers. It provides us with 8 slides that conclude that we aren’t saving enough and could do better. This is an extract which suggests that this report will be widely distributed. I suspect that is targeting the Pension Commission and that it is not so original as Pensions UK are making out.
The main things you need to know
The current system works
It is understood by savers and employers, but the minimum automatic enrolment contribution level is not enough to deliver an adequate retirement for many savers.
12% contributions are more achievable than perhaps was thought
Savers questioned were open to a 1% increase in their contribution, especially if it coincided with pay rises or was gradually introduced. Employers understand that contributions may need to rise, but ask that any increases should be phased in.
Simplicity is strongly preferred
Savers questioned tended to favour clear default contribution rates and were wary of flexibility, which they fear could undermine saving. Employers are concerned that more flexibility would add administrative burden and a greater risk of incorrect contributions.
Whatever is chosen would have impacts on the UK economy
Higher contribution rates could mean more long-term economic growth via investment as well as better adequacy, but would reduce short-term GDP and household spending.
The reality is that for the majority of people in workplace pensions, what they find when they get to a point when they lose the capacity to work and earn as they used to do is that they have savings from their workplace pensions to fall back on.
But do they do not get a works pension as people who were lucky enough to be in a DB plan used to.
Actually, increasing the compulsory contributions into these savings plans from 8% to 12% will help but not to get a pension. It will be seen by many as an increased tax by employers and employees. For this to happen, there will need to be clear advantage to doing so. It was and is clear to those in DB schemes that there is a wage in retirement resulting from their saving.
This is not the case from workplace savings schemes and until they win back the affection of those paying into them (workers and employers), there will be push back no matter what this report says , no matter what the Pension Commission reports.
The Government’s response has so far been to avoid demanding increased contributions, even though Government said it would by this time back in 2017. The pensions industry has lost the argument for more money to be paid to it and I would suggest it needs to do better our savings than it is doing now.
Why do employers and employees not pay more for pensions?
The answer is that the pensions industry has failed to convince Governments to enforce higher contributions and they’ve failed to encourage the vase majority of employers to pay more money in either through increased employer’s or employee’s spare cash.
This report it is someone else’s fault. But it is not. It is the fault of not providing popular product. Since 2012- when RDR ended the incentive of advisers to sell product that paid commission, those outside AE have stopped paying. The self-employed have stopped paying into “pensions” because they see better ways to go about providing for retirement.
When I was young, a pension was something that people aspired to having. A job was a good job if it came with a pension and we all knew what a pension was, it was a wage in retirement. People were and are amazed by workplace pensions that pay them month after month sometimes for 30 years or more.
We have lost that connect and though a much higher proportion of us are now saving into plans, we no longer feel that way about our pot. Most of us are terrified by a pot that they don’t know what to do with.
This Government has started out its work by requiring pensions to be available in return for the savings being done. Those pensions may be DB, DC or CDC but they will all in future have a regular income as the default outcome. A regular income (albeit a level one for DC – increasing for other pensions (most of all the state pension) will be displayed on dashboards.
This will mean that people who thought they were doing alright will discover that they may not be and may voluntarily increase their contributions, they may put pressure on their employer to do the same and either way they will demand better from their providers.
Providers of workplace pensions are not yet “amazing” us enough to make us save some more.
Prompting individuals to save more?
Again, maybe Americans are different, but, I found the best opportunity to prompt workers to save more was a combination of four strategies. Four strategies are needed because of the diverse needs and priorities of the American workforce.
First, automatic features, applied perennially, so that those who opt out are reenrolled at least once a year. Those automatic features include not only a default of enrollment, but an auto escalation and default investments as well. When folks complain ‘how many times do I have to tell you I don’t want to save (or to save less)’ the response is always the same ‘just once a year’.
Second, recognize that saving for retirement is not a top financial priority for the majority of individuals under age 50 or 55, so, incorporate provisions that offer liquidity without leakage, so that the DC plan or pot can serve as the “Bank of Tapper” for Henry, where individuals can access a portion of those assets “along the way to and throughout retirement” with a requirement to repay, with interest. This liquidity (perhaps provided via electronic banking using a line of credit functionality, with behavioral economics nudes/prompts designed to maximize repayment) ensures workers can save more than they would otherwise earmark for a distant, uncertain, perhaps unlikely retirement.
Third, in the states, median tenure of American workers has been less than 5 years for the past 7 decades, and, median tenure of American workers age 50+ has been less than 10 years for the past 5 decades. As a result, workers have, on average, and averages can be deceiving, more than 11 employers by the time they reach age 50, and, importantly, for more than two thirds (and perhaps as many as three fourths) of those retiring at Social Security Full Retirement Age (67 for those born on/after 1/1/60), their last employer is not the same employer they had at age 50. As a result, makes no sense to encourage every employer-sponsored plan to incorporate guaranteed income insurance products. Instead, Americans need options for consolidating assets and since 1975 (made universal in 1982), our vehicle is the Individual Retirement Account. A substantial minority of all retirement assets from employer-sponsored plans have migrated over to IRAs following separation from the sponsoring employer. Importantly, an ever larger percentage of employer-sponsored plans have changed strategies and, instead of prompting people to take a distribution, they have plan features and communications which encourage asset retention – such that nearly one of every four accounts in employer-sponsored plans belongs to someone who no longer works for the sponsoring employer.
Fourth, finally, a significant number of mostly smaller employers do not offer an employer-sponsored retirement savings plan. And, a significant minoity of Americans are self-employed. As a result, those workers only have access to the Individual Retirement Account (IRA) – where the maximum annual contribution is $7,000 US. Since 1982, employers have been able to offer access to an IRA via payroll deduction or splitting the net paycheck – via electronic banking. In the states, since 2002, we also allow plan sponsors to attach an IRA to an employer-sponsored plan (called a Deemed IRA) – which allows most former workers who have maintained an account at their former employer, to continue to contribute and save for retirement in their former employer’s plan … even after leaving their former employer.
Not sure how many of these strategies are available in the UK. But, if not, you may want to prompt discussion of the pro’s and con’s for these features which can be delivered at low or no cost.
Keep or pitch.
Jack
We did pay more last century and what happened, we got Gordon Brown who robbed us! We got Equitable Life that collapsed with little help from government. We got Trustee’s seeking to save money and just looking after themselves not the members by taking Pension Holidays!. We had daft laws about ‘deferred pensions’ that turned out not to be there on reaching NRD and now we have no inflation indexing to cover past mismanagement!
Last of the Empire’s Warriors
Sounds ugly!
We had a comparable failure, perhaps on a grander scale in the states – our Savings and Loan (S&L) crisis. It was triggered, in part, by the Reagan Administration’s economic policies designed to foster emergence from the “stagflation” of the 1970’s and early 1980’s – high rates of unemployment combined with high inflation rates.
To combat double-digit inflation, the Federal Reserve raised interest rates dramatically. Because S&Ls were historically locked into funding long-term, low-interest mortgages, their net worth evaporated when they had to pay significantly higher interest rates to keep customer deposits.
Instead of recognizing the industry’s insolvency, the federal government relaxed regulations – permittin S&Ls to offer high-yield accounts and enter riskier commercial lending to “grow” their way out of trouble.
With taxpayer money backing these federally insured accounts, failing institutions took massive risks on commercial real estate, junk bonds, and speculative development, particularly in states like Texas. Many of these ventures went bust, further depleting the industry – bankrupting the Federal Savings and Loan Insurance Corporation (FSLIC).
The savings and loan (S&L) crisis of the 1980s was the failure of roughly a third of all U.S. savings and loan associations, driven by a mismatch between high interest paid on new deposits and low interest earned on older, fixed-rate mortgages. Over 1,000 S&Ls failed. Between 1980 and 1994, a combined total of 1,617 S&Ls and commercial banks collapsed, with regulatory agencies eventually resolving 1,043 failed thrifts directly.
Deregulation and risky lending ultimately cost taxpayers over $130 billion, leading to massive industry overhauls.
Personally, we had a CD at one of those S&L’s where our interest rate was halved from the guarantee. And, my wife had a retirement investment which had to be reformed by the States of Texas and Indiana. We were “made whole” in terms of the investment we made, not the promised investment earnings.
https://www.latimes.com/archives/la-xpm-1987-07-10-fi-1915-story.html