Dead under the bed

March 2010

Far be it for Pensions Insight to suggest that other sections of the media might be painting retirement savings in a bad light – but this month has thrown up a hatful of exposés that will do nothing to encourage greater savings for old age.

Excessive fund manager charges, the continuing spectre of Equitable Life, a collapse in income from fixed-rate annuities and over-reliance on equities in default funds will add fuel to the fire of those linking the words ‘lost decade’ with ‘pensions’. Some commentators are questioning whether there is any point paying into a pension at all. Perhaps it would have been better to spend the cash on a big party rather than have lost it trying to do the right thing for the future.

What are the alternatives? Keeping retirement savings in a biscuit tin under the bed takes loss aversion to extremes – and how many biscuit tins include an inflation hedge?

As we all know, opting out of an occupational pension means turning away an employer contribution and a contribution from the government in the form of tax relief.

Of course, there are other forms of tax-free savings. Many an IFA would put forward an individual SIPP (self-invested personal pension) as an alternative. But these can attract high fees and are not remotely appropriate for the majority of low-earners. More financially aware and affluent workers could also consider maximum income plans, or take advantage of the tax breaks on investment bonds. But, again, these are not within the grasp of lower income investors.

Another option might be an ISA. This retains the tax-free benefit of a pension and is more accessible for lower income savers. However, interest rates on cash ISAs are hardly record-breaking – and only £3,600 out of the £7,200 limit for the under-50s can be invested in cash. The other non-cash ‘stocks and shares’ portion can include bonds and equities, but are neither risk-free nor fee-free and so suffer the same drawbacks as pensions. With fees generally higher, they could be worse.

Despite the shortcomings of alternative options, the pensions industry is aware of the brickbats being thrown at it. Default DC fund design is an area of substantial research at present – both in terms of asset allocation and fee structures. Corporate wraps offering a range of occupational retirement savings options with varying fees and risk levels are another option.

That will come as scant consolation to anyone who is currently trying to buy an annuity. Great reputational damage has been done to pensions over their ‘lost decade’ which needs to be reversed if the public is going to regain faith in them. Pension providers and employers must clamp down on fund charges, reduce reliance on equities in default funds, build flexibility into savings and contribution arrangements – then communicate all of that to members. In short, everything that makes a really good quality DC scheme.