Lord Mcfall Highlights Pensions Crisis Yet Again But More Radical Solutions Are Needed
Charge Caps Failed With Stakeholder, We Need More Creative Thinking
Pensions Have A Bad Name – We Need To Make Them ‘User-Friendly’
by Dr. Ros Altmann
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Pensions Crisis will soon become a ‘pensioners’ crisis: Lord McFall’s report is once again highlighting that we have a pensions crisis in the UK – and that if we fail to deal with it effectively, we will soon have a ‘pensioners’ crisis, with millions retiring on inadequate incomes and having to spend their final years in penury.
Report identifies problems but fails to offer creative solutions: Lord McFall is right to point to the high charges and complexity of pensions and the fact that pension companies put consumer interests pretty far down the order of priorities. We have seen that time and again. He is also right to highlight the problems faced by those buying annuities, who often end up with the wrong annuity and are stuck with it for the rest of their life as they cannot change that once it is bought. However, he does not come up with creative solutions.
Charge caps did not work with stakeholder: He suggests charge caps to ensure lower costs, but that was tried with stakeholder pensions and failed miserably. He suggests people should have an annuities marketplace to get the best price, but annuity problems are about more than just price. He talks about the inadequacy of the current 8% contribution rate proposed for automatic enrolment – but just pushing up that rate will not work if people opt out.
Need new thinking: Yes, private pensions are not fit for purpose, but we will not solve the problems we have by using the same kind of thinking that caused the problems in the first place. Times have changed and the pension system needs a radical image overhaul.
Must get rid of mass means-testing in state pensions: State pension reform must remove mass means-testing and then private pension reform should consider re-naming private pensions and making them more flexible. As long as the state pension penalises many private pensions, they may not be ‘suitable’ for many low or middle earners. With nearly half of pensioners ending up entitled to means-tested state payments, if they do save in a pension they may end up losing much or all their money. Radical state pension reform is under consideration and needs to proceed urgently.
Trust in pensions has been destroyed by scandals – they need an image makeover: However, a major reason that people are not saving in a pension is that pensions have an ‘image’ problem. There have been so many scandals and disappointments with pensions that people have lost trust in them. I believe they need an ‘image’ makeover – perhaps changing the name of private pensions to call them something else and trying to make them more exciting for people. Or how about a lottery attached to pensions so that people may feel there could be something in it for them today, not just in the future.
Auto-enrolment will not make our private pensions system fit for purpose: Automatic enrolment next year will not solve the problems that Lord McFall identifies because
- the 8% of salary that will be put into these pensions will not be enough to provide a decent pension and many people will not even want to contribute their 4% share, so will opt out. Just increasing that 8% will not help if people opt out.
- Young people will be likely to opt out because they don’t want to bother with pensions and are coping with day to day living costs or big debts – they feel their money is being confiscated due to the lack of flexibility in pensions, so early access for some of the money is needed
- NEST will charge a 1.8% initial fee so the scheme will not be ‘low cost’ and investment risks cannot be avoided in private long-term savings
- Major annuity reforms are urgently needed, so that people get advice to find the right annuity at a good rate. Basic advice should be mandatory for all. Insurers charge commission whether or not people get advice, so the FSA should ensure customers get some value for this ‘commission’ that they pay anyway. So far, annuity reforms focus only on getting a good rate, but this is not necessarily the most important issue. For example, married men who buy a single life annuity without a money back guarantee can end up wasting their pension savings if they die early but often nobody advises them of the risks. Even if they had the best rate for their single life annuity, their money would still have been wasted.
Restoring trust requires more creative thinking: If we are to restore trust in pensions, we need new thinking. Pension savings have been falling year after year, because people no longer trust pensions and because new-style pensions are not offering them what they want. Younger savers do not want to tie their money up in a savings product which ‘confiscates’ their money for decades and which they cannot touch even if they really need it. Given high debt levels among the young, this kind of approach may not even be optimal. The pensions industry needs to capture people’s imagination, not just lecture them about doing ‘the right thing’.
New name, lottery prizes, £1million a month? How about re-naming private pensions and allowing people to access the money if they really need it? How about lottery prizes – say £1million a month for someone saving in a pension? This could help people see that there may be something in it for them now, not just into the distant future.
Lord McFall is right that larger pension schemes should help lower costs overall, but the reality is that charges and risks will remain. Trust has been undermined by too many scandals and savings levels are falling as workers struggle with the costs of everyday living. To make private pensions fit for purpose, we firstly need to radically overhaul state pensions and get rid of mass means-testing and then we need to radically overhaul private pensions, to ensure that they fit with people’s lives. Simpler savings products, more flexibility, lower charges and higher contributions would all make an enormous difference. Coupled with radical annuity reform and more exciting products (such as a large lottery prize) we may finally start to rebuild confidence in long-term saving which has been so damaged in the past decade.