Let's not sleepwalk into another pensions disaster

It is clear something had to be done about the current state of pensions in this country. Confidence and trust in pensions amongst the general public is at rock bottom, and no one appears to be able to change the public’s mind at the moment. A-Day will help, and indeed, Lord Turner and the government have done us a great service in looking seriously at the issue of saving for retirement.

But the more I look at the proposals set out in the government’s white paper, the more concerned I become about its potential impact on company-based provision today.

I also increasingly question what it is about current employer-backed pension schemes — many of which contribute much more than the Pension Commission’s recommended levels — that Lord Turner appears to dislike so much. I am deeply concerned that there is a huge danger that we are sleepwalking into yet another pensions disaster.

The National Pensions Savings Scheme (NPSS) will only ever be able to deliver basic funding for retirement. This is because NPSS holders will not be engaged; they will view it as a tax on their earnings, and will therefore only ever contribute what they are forced to. This, as we all know, is going to be nowhere near the levels required to fund a good pension plan.

Most worryingly, it could also encourage firms to dump good final salary or money purchase schemes to save them money.

Considering this, what is so fundamentally wrong with the current company-based infrastructure? The life industry is not the industry it once was — it is now well-regulated, has strong levels of capital reserves and has good customer service as its number-one priority.

The UK life and pensions industry is the third strongest in the world, providing more in way of pensions than the government. It has also invested heavily in excellent support systems and infrastructures to cope with stakeholder pensions; it currently runs administration systems and group pension schemes highly efficiently.

The fact that they are run commercially means that innovation and competition keep the market keen. It is also obvious that auto-enrolment, effective employee communications and an employer contribution will contribute significantly to closing the savings gap in pensions.

I know, because Winterthur has encouraged all three over recent years through its worksite marketing programme, and has seen big increases in pension scheme membership from around 70% to 97% depending on the company.

Anecdotal evidence suggests that administration of large schemes can currently be arranged for less than the original Stakeholder annual management charge of 1%. The circa 1% cost often associated with the industry is based on personal fund/account selection and includes advice/guidance and distribution costs. If these are stripped out the actual administration costs are nearer to the rates referred to by Turner.

However, for any of these models to be successful, people must be engaged through good communication that helps them understand why they are in the scheme and what it will deliver on their behalf. This is not achievable at such low cost.

Level of return

In the Australian experience the public policy debate on fees centred on the overall net rate of return after fees and was critical in consumer thinking. The debate in the UK should therefore move away from its focus on fees and onto the overall net rate of return.

While inexpensive funds must be available for those who want them, the main focus should be on what people get back rather than how cheap you can get the charges. Whatever happened to the government’s appetite for choice and the opportunities-for-all culture that promotes levelling up?

Education and advice

Evidence from Winterthur Life’s experience in the Group pensions market shows that even when employees are offered a generous contribution from an employer — with no strings attached — take-up can still be as low as 50% or less. A great many employees are turning down thousands of pounds every year through apathy or disinterest. Education is key to reversing this trend, and evidence from our communication programmes shows that it is possible to work with the employer to sell a pension scheme.

Winterthur does not believe in full compulsion for a number of reasons. It does, however, believe that fair and unbiased financial education to the public from an early age will make a real difference in combating the pension crisis.

This education should be continued proactively in the workplace all the way through to pre-retirement — strong effective communication is a critical component of any scheme. 

Incentives

For many years the focus has been on the supply side of the pensions equation, looking at costs, features and contract details. The focus should move to the demand and more attention be given to incentives to join and remain in a scheme. The proposed NPSS would not assist people in understanding why they are saving and would do nothing to mitigate the feeling of coercion.

Incentives could involve contribution matching by the government at certain levels, and involve additional support for employers (perhaps tax or NI based) who achieve particular, specified levels of scheme take-up. The removal of means testing would also act as an incentive to saving. Add to this auto-enrolment, education and communication as outlined above and the package will act as a huge incentive and a retainer to scheme membership.

I urge the government to weigh up the pros and cons of an NPSS-style arrangement and to consider hard the impact of the law of unintended consequences on the excellent pensions infrastructure we already have in this country.

We have seen dramatic uplifts in take-up, and interest in contributing more from employees in our schemes once they have become engaged in their own savings for retirement — auto-enrolment and tailored communications are both key to achieving this.

Only once it is clear that the current infrastructure has been fully harnessed should a new national scheme be offered.

Mike Kellard is Chief Executive Officer at Winterthur Life.