We’ve ripped up the rulebook on pensions, now it’s time to write a new one, argues Sara Benwell
Who truly understands the world of pensions? Certainly not the Bank of England’s chief economist Andy Haldane. In a speech he gave at the New City Agenda annual dinner he said: “I consider myself moderately financially literate - yet I confess to not being able to make the remotest sense of pensions.”
He’s not the only one. Calls to the Pensions Advisory Service found that an overwhelming majority of people (71%) stated they see pensions as complicated. In fact, I see hundreds of pieces of research a year with various statistics which show that the vast majority of people simply don’t understand pensions.
This can’t be a good thing. If we need to people to be provided for throughout increasingly long post-retirement lives we need to make sure that people understand what a pension is, how much they need to save, and what to do when they reach retirement age.
At the heart of this issue is the changing nature of retirement saving. There was a time when a pension was relatively straightforward and well-understood. At first we had deferred pay, and then we had DB schemes where people knew what their contributions were and how much they would get paid later in retirement.
One thing that both of these systems had in common was the idea of an income for life. And the old world of ‘forced’ annuities, while deeply flawed in many respects, provided that same sort of security.
We have ripped up the very definition of pensions”
There are very few that would challenge the need to move away from poor value annuities or who don’t understand why companies no longer wish to be burdened by increasingly unmanageable DB schemes, but the fact remains, we have ripped up the very definition of pensions.
Broadly speaking, our new definition seems to be a long-term savings vehicle that can only be accessed from a certain date, but after which people can do what they want with.
This shift in meaning isn’t necessarily intrinsically problematic. But unfortunately we forgot to give the people who we are affected the new rulebook.
There are potential benefits to freedoms. One would be better and more diverse choices which reflected what people needed from later life. Alas, research from Intelligent Pensions found that people were shopping around even less now than they were before.
We can’t stuff the freedom genie back in the bottle, it’s far too late, but we can and must educate people about what the new world means for them.
And we in the pensions industry cannot rely on the government, or its cuddly monster Workie, to do it for us. For scheme managers and trustees the benefits of getting people engaged are obvious, but for providers there is motivation to be had too. Not least, because we don’t want people to take all their hard saved money and sink it in property, or cars or stuff it all under the mattress.
We can’t change the pace of regulatory change, but we can take the time to better communicate”
And there are things we can do. We can’t change the pace of regulatory change, but we can take the time to better communicate in a jargon-free way. We can take pains to educate people about sensible at-retirement options. We can create deferred annuity products that give people security in later life. We can give people access to advice.
The definition of pensions may change, but the fact that people need income through retirement will not. And if we must have a new pensions landscape, let’s give people the map they need to navigate it. Otherwise, if not even the Bank of England’s chief economist can understand pensions, what hope has anyone else got?
Confusion at every stage in the retirement journey
At the auto-enrolment phase, people are defaulted into arrangements where the vast majority pay the minimum contribution levels and have little idea where their money is invested.
Meanwhile, at the point of retirement the newly introduced freedoms only serve to complicate matters. The Pensions and Lifetime Savings Association found that since the introduction of the new rules 56% of savers feel more uncertain about what the future holds for their retirement and 53% said they thought the changes were introduced to chase votes.
14% of those retiring this year have made no provision for their retirement and will be either totally or heavily reliant on the state pension when they retire, according to new research from Prudential. Yet most people don’t understand their state pension entitlement.
The TPAS data showed that 73% of people said they thought the state pension would enable them to live comfortably in retirement, with one in five citing it as their main source of income. Yet, a third admitted they did not know how much state pension they will obtain or how to acquire an estimate for this.