Vanguard has produced a document whose aims I most approve of but whose recommendations make no sense.
Thanks Fum, Maria and Jumana but for most people, the level of contributions to pensions is akin to national insurance. It is something that disappears from pay and appears on the payslip or if salary sacrifice has been approved, is only detected in a SMPI statement that appears once a year.
It is not until they get close to retirement that the grim reality of a shortage in their retirement income becomes apparent. That’s because most people are comforted by what appears to be a lot of money in the pot,
It is naive to think that accelerating the amount that appears in the pot over time will justify the impact of finding out that this increase in contributions has reduced their pay. Because this is what will happen when the finance manager works out how to budget for bigger pension contributions.
The budget of the finance team will mean less in the monthly payment that goes to you.
The decisions of the millions of us who choose to be self-employed is even more extreme. When given the choice to give themselves a choice of paying into pensions or paying themselves a bigger wage, they almost universally choose to pay themselves. Avoiding mandatory pay deductions is one of the reasons the self-employed chose not to work for someone else.
Infact it’s not just the self-employed who are outside of pensions, it’s those who have chosen to get out of the pension payments they’ve spotted coming out of pay and those who either don’t work for enough or don’t work at all. All these people (45% of people between the ages of 22 and 75) aren’t paying anything into a funded retirement pot.
But ask them if they’re in a pension and a lot will say they are in the state pension and that is good enough for them. Many people started being nudged into the 5% of salary that they’re paying (many poor people don’t get a penny of that money back as tax-relief). Some who were in a pension have opted out because they cannot afford it and a great number have gone self-employed to get away from pay deductions.
The majority of people (77% according to Vanguard’s research) don’t have retirement plans. But that’s because they think they will get a way forward when retirement age comes. That’s what they like about the state pension and it’s what they want to happen with their pot(s).
Soon they will get a dashboard that will show them on their phone what they will get. But when they ask how to get a pension from their pot, the difficulties start. 77% of people will struggle to turn pots to pensions and yearn for the system that pays them a “works” or “state” pension with minimal choice.
What they don’t like is discovering that it is their responsibility to take a lot of decisions about how their pot is paid to them. One of the world’s great economists , Bill Sharpe , has called turning a pot to a pension “the hardest problem in finance”.
The manifesto from Vanguard is to improve the amount of money that goes in and improve the money that comes out. At least this is what I take the title of the campaign means.
It is not for the pension industry to get employers to structure their “reward” to suit what we want to do.
A finance manager will be much more interested in a pension person who says, as one trade union is saying, that moving to a more efficient “collective pension” is worth a 3% increase in wages.
There is nothing wrong with what Vanguard is doing, infact I think it does the wealth management bit really well. But Vanguard’s people don’t know what it’s like to know nothing about pension planning and wants it all done for them.
There is space for those who want to do it themselves, it’s needed by the self-employed. There needs to be space for those who have no pension either by choice or circumstance. There is the pensions credit and many people will rely on money from other places than the pension.
Despite this, the majority of British workers want pensions done for them and are fed up being told they need to engage in something that’s not their job.