Is the savings industry finally waking up to the dangers of pension inflexibility?
ABI recognition of potential unsuitability of pensions is hugely welcome and long overdue: At last, the Association of British Insurers’ chief – Otto Thoresen – is admitting that it would be better to use pension savings to pay back student debts, rather than locking young people’s money away in a pension that can’t be touched for decades. In a speech today, he will suggest young workers should be allowed to use pension savings to pay back student debt. This is very welcome thinking – and long, long overdue.
Auto-enrolment requires recognition that pensions inflexibility does not fit with everyone’s lives: The pensions ‘locked box’ is not suitable to many of today’s workers. As we head towards auto-enrolment, with millions of low earners being forced into pension savings from which they have to choose to opt out, we urgently need to also consider how to redesign pensions so that they suit more people.
Increasing savings is important, but pensions have disadvantages for many savers: Young people, or older workers on low earnings, or those in significant debt or saving for a house, do need to save or pay back student and other debt, but if they contribute to a pension scheme their money is locked up and they cannot access it until much later in life.
Disadvantages of current structure mean fewer savers and poorer value: This has several significant disadvantages. Firstly, it puts many people off and they will opt out of saving. Secondly, they may need the money desperately in a few years’ time (perhaps they become ill, lose their home, need to retrain and take time out from work etc.) but it is lost to them. Thirdly, older workers may find their pension savings are penalised by means tested benefits they become entitled to in retirement, so their pension savings are not delivering value and they would have been better spending the money or saving in a different form.
Focusing Government workplace savings policy on pensions only is understandable, but not optimal: It is time to recognise that pensions may be past their ‘sell-by’ date and we should consider how we can make them fit better with people’s lives. Pensions are not the only savings vehicle worth having, yet Government policy is currently focussed almost exclusively on getting people into pension schemes. This is understandable, but not optimal.
If workers don’t contribute to a pension fund, they lose their employer contribution:At the moment, policy only requires employers to contribute to a pension fund for their staff – any other form of saving receives not mandatory employer input at all. So if a young worker wants to use their income to pay back their student debt, or if workers are saving to buy a home, they receive much poorer value from their savings, as they lose the benefit of an employer contribution to their savings – and usually lose tax relief too.
Pensions should become ‘Lifetime Savings Accounts’ that can be used for people’s needs as their lives develop: I would urge the Government to consider changing the design of pensions, and encouraging or requiring employers to contribute to other forms of saving for their staff.
The ‘pensions or nothing’ policy is going to leave too many with nothing!: Workplace ISAs, pensions and debt repayment accounts can really help revitalise savings in a way that pensions alone will not. Government wants to help workers get used to the benefits of saving, but forcing them into a savings account that will deny them any access to their own money for decades will mean many opt out, for understandable reasons. If they were saving in a ‘Lifetime Savings’ vehicle, which could be used if needed for other saving requirements, this would be far more likely to encourage them to save, as well as helping their lives.
Employer contribution could be used to repay student loans for younger workers, or locked into a pension: Employers often say they are happy to help pension savings, but do not want workers to just fritter their money away. Such objections can be overcome in a number of ways. For example, we could design auto-enrolment so that employer’s money (and the tax relief) is accumulating in a pension but the worker can access their own contributions for other uses. Or employer contributions could be designated as either pension saving or student debt repayments. This would mean savings will fit far better with people’s lives and is likely to lead to far lower opt-outs and far more people saving and getting used to the idea of putting money away for the future.
Such creative thinking, taking account of people’s lives, is urgently overdue. I hope that we may be seeing the first signs of the industry itself recognising the need for change.
Dr. Ros Altmann – 07799 404747
26 January 2012