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We spent much of the 2010s implementing automatic enrolment, adding millions of savers through workplace pensions. It was a huge success. Pension freedoms brought welcome flexibility for those nearing retirement, removing the singular focus on annuities. And the State Pension was significantly simplified.
However, policymaking since then has been at best rather piecemeal, with incremental changes here and there on disclosure requirements, some adjustments to start paving the way for illiquid investments and the usual ups and downs of tax allowances.
There is evidently consensus around certain areas, though:
Everyone agrees that saving 8 per cent of a band of earnings is unlikely to be sufficient to achieve the retirement pot most people will need when they reach retirement
Similarly, there is widespread agreement on the need for greater support for people making retirement decisions
On contributions, it’s great to see the recommendations of the 2017 automatic enrolment review finally making their way through parliament, albeit simply in an enabling capacity. Reducing the age of eligibility to 18 will help people start saving earlier, and removing the Lower Earnings Limit will significantly increase the amount being saved for people on lower pay. Arguably, these changes pave the way for a more strategic review of the savings levels.
No-one would suggest that we make changes to increase pension contributions significantly at this point. If anything, some people are having to cut back on savings or even dip into them just to get by, while the cost of living remains so high. But having a plan is crucial. Perhaps a plan that is conditional upon economic conditions being right before increases are made, but a plan that is executable when that time comes.
After all, the cost-of-living crisis today is perhaps instructive when considering what an under-saved retired population might look like in future.
It’s also becoming increasingly clear that people need more support in making retirement decisions. ‘Pension Freedoms’ were brought in almost a decade ago and, despite some well-intentioned work around structured guidance sessions, few people are receiving any support or advice as they make what for some will be the most significant financial decisions of their lives.
The forthcoming review of the advice / guidance boundary provides an opportunity to put this right, to focus on how we can help people, rather than simply warn them of all the dangers they face. It would also be sensible to focus on how we can reduce costs for advisers, hopefully leading to more people being able to access advice at a cost more proportionate to their needs.
This year’s Corporate Adviser report on ‘Master Trust and GPP Defaults’ provides unique insight into the current market for workplace pensions, highlighting an additional consideration; investment performance. Returns have varied wildly in recent years, most recently during the economic turmoil over the course of 2022. By their very nature, returns are not guaranteed and will never be wholly predictable, but there is more we can do to help people understand how their money is invested and whether that is right for them based upon their personal circumstances.
Certainly, the near singular focus on charges, with workplace schemes often won or lost for a few basis points of difference, is somewhat overshadowed by the 100s or even 1000s of basis points of difference illustrated in the investment returns. If we are to be truly focused on member outcomes then we must focus on the areas which make the biggest difference.
For contract-based schemes – group personal pensions – the consumer duty will bring an increased focus on real member outcomes. This should sharpen the focus on the key issues: adequacy of contribution
levels, support in decision making and investment suitability.
With a more strategic focus on the right issues, we may yet avoid the worst of the looming cost-of-living crisis in retirement.
We may even be able to make retirement something for everyone to look forward to. As it should be.