Pensions Insight goes on a world tour to find out what’s in store for pensions in the UK
As far as defined contribution markets go, the UK’s is a relatively immature one. However, it is developing fast as a result of auto-enrolment. We have spoken to experts from overseas and analysed reports on pensions across the globe to identify five trends that are likely to make it to the UK - and stick.
The extent of coverage will become a big debate
How far should auto-enrolment extend? A current criticism is that self-employed people aren’t covered by the legislation. Nor are people who earn under £10,000 a year, which especially disadvantages many women who work part-time, and other flexible workers.
UK politicians have already acknowledged the problem. In a speech last year Rachel Reeves, the shadow secretary of state for work and pensions, accused the government of “withdrawing support from those who are at the sharpest end of the labour market.”
Most of the industry acknowledges that getting the level of coverage right is a difficult balance to strike. In a recent consultation response, the National Association of Pension Funds concluded that “freezing the trigger for this year at £10,000 strikes the right balance between simplicity and coverage”.
Thus far in the UK, the debate over coverage has mainly been between experts. Overseas, however, where DC schemes are more well-established, it has hit the public’s agenda. Steve Utkus, head of asset manager Vanguard’s Center for Retirement Research, reports that there is a debate about coverage for the self-employed in the US. Jeremy Cooper reports “huge public interest” in superannuation in Australia.
“Freezing the trigger for this year at £10,000 strikes the right balance between simplicity and coverage”
“Increasing the coverage of employees and/or the self-employed in the private pension system” is also a key recommendation of Mercer’s Global Pension Index report. Mercer’s research encompasses 25 countries; it recognises the level of coverage as a common challenge across the world.
An increase in contribution rates
As pensions provider Aegon noted in its recent Retirement Readiness report: “even once contribution rates reach the 8% combined employer / employee level in 2018, this falls far short of what most people would need to be paying in to have an adequate income in retirement, let alone the levels this research indicates people would like.”
Outgoing pensions minister Steve Webb recently highlighted the importance of increasing contribution rates for DC savers. In a speech at Workplace Pensions Live about the challenges the new government faces, he said that it will have to start thinking about increasing contribution rates “today”.
Webb said: “The lead times on these things are huge. If the government doesn’t start thinking today about how we get beyond 8 percent, it won’t happen in this Parliament.”
David Blake, director of the Pensions Institute, notes in Pensions 2022: A vision of the future, a report on the future of pensions produced by mastertrust NOW: Pensions: “The second strand of a ‘save more tomorrow’ plan is auto-escalation. The government accepted the first strand, auto enrolment, but chickened out of auto-escalation.
“Auto-escalation – the automatic increase in the contribution rate every year for three or four years – would in time provide the right level of contributions needed to produce a reasonable pension in retirement. That, in my view, is going to be the big challenge from 2018 to 2022 – the 10th anniversary of auto enrolment: can a government of the future bite the bullet and try to raise contributions to 10% or 12%? They managed to do this in Australia. Auto-escalation is the most likely way the government will seek to increase contribution rates.”
As Blake says, contribution rates are already higher in Australia, where saving into a workplace pension scheme is compulsory. In July 2014 the government legislated to increase contribution levels from 9.25 percent to 9.5 percent. In the UK, the minimum contribution level is currently only 2 percent, although this will increase to 8 percent in October 2018.
“There is a sense of urgency about getting that 8 percent up”
Because saving into a pension is mandatory in Australia, the increase in contribution rates has been relatively straightforward – although there has been some debate about whether the employer or employee should foot the bill. In the UK, auto-escalation may trigger more of a debate, because savers are free to opt out if they decide that an increased rate of saving is unaffordable.
There are smart ways to introduce auto-escalation, however. Aegon’s research suggests that nearly half of non-savers (45 percent) would start saving for retirement if they received a pay rise.
“Employers can also build workplace retirement awareness programs around important savings triggers such as receiving a pay raise,” the report suggests. “This represents a major opportunity for affecting changes in employee savings behavior by automatically increasing contributions in line with future increases in salary.”
However it is structured, an increase in contribution rates is the only way that auto-enrolment will provide the new generation of DC savers with the money they need for a comfortable retirement.
We will all become robots
Just kidding. But seriously, technology is likely to revolutionise savers’ interactions with their pensions over the next few years, making it much easier to make decisions. “We are going through a customer-centric revolution,” says Jeremy Cooper, the Australian lawyer who chaired the Cooper Review, a government review of the superannuation system.
What some US pension providers are terming “robo-advice” is likely to play a growing role on this side of the pond. Automated walk-throughs of the various retirement options, based on the size of their own pots, will help savers who are unwilling to pay for an independent financial adviser to make informed choices.
Vanguard has already adopted this technology in the US. “There are humans involved, but it is technology driven,” explains Steve Utkus.
Utkus is evangelical about the role that technology will play in helping members to make simpler, more educated choices. He hopes that one day it will be as easy for people to select or adjust a pension income as it is to post on Facebook. And just like Facebook, “Pension funds are transferring to mobile,” he observes.
It’s the same story in Australia. “Mobile phone technology is prevalent,” agrees Cooper.
Technology moves fast, but as it stands on a global level, pension funds and their members risk being left behind. Only 12% of employees can access a retirement savings online portal worldwide at the moment, according to Aegon’s research.
Providers’ influence will increase; employers’ will decline
In Australia, pension funds are reaching out directly to members – and employers are increasingly finding themselves left out of the equation. Technology is making it much easier for funds to communicate with members and as interest grows along with pot sizes, members are more willing to engage, reports Jeremy Cooper.
It isn’t difficult to imagine the UK market going the same way. Mastertrusts already provide employers with communications for their employees. Why not cut out the middle man?
Some argue that paternalism among employers will prevail. But employers are already casting off the shackles of defined benefit. The government’s freedom and choice agenda is tacitly encouraging people to take responsibility for their own pensions. Perhaps it will take a generation, but then again, the influence of technology could trigger a faster shift.
Holistic advice will go out the door
“Keep it simple,” is Steve Utkus’ view on advice.
DC savers worldwide are retiring with a plethora of different assets, from property to ISAs and different pension pots. Many of them will not seek advice – and Utkus’ view is that it’s much more realistic to tell them what money they can take from their pension pot, and how they can take it, than trying to give them advice about their finances in the round.
Utkus concludes: “Don’t integrate advice. Not everyone needs holistic advice - make it more income-oriented.”