We are now over a decade on from auto enrolment in the UK. In many respects, it has been a resounding success. Nearly 9 in 10 eligible employees now save into workplace pensions worth over £110bn.
There is a problem, however. This breadth of participation has not been reflected in a depth of understanding. A recent study by the Money & Pensions Service found that less than half of UK adults (47 per cent) said that they understood enough about pensions to plan for their retirement. A similar number, 44 per cent, had not interacted with their pension over the last 12 months – not even looking at a simple annual statement.
When it comes to pensions best practice, it makes sense for us to look abroad. Perhaps the most informative example is Australia. Back in 1992, Australia was the first country in the world to mandate auto enrolment retirement plans, with employers obliged to pay a percentage of an employee’s salary into approved superannuation funds.
This system of ‘supers’ has been a resounding success. Part of Australia’s success has been the existence of a strong workplace pension brand. Take the trade body Industry Super Australia, representing 11 large industry funds who together manage retirement savings for nearly five million Australians. Super Australia competes with retail super funds typically run by banks which, at least in the fees they charge, typically provide worse value for retirement savers.
Industry Supers have combined to run an impressive marketing campaign called Compare the Pair, which sought to demonstrate how retirement savers could save money by investing in an Industry Super Fund over a retail fund. Two people with the same age and same income, the campaign showed, could have very different retirement pots depending on where they put their money.
I think that we in the UK need a similar campaign for workplace pensions as a whole.
In the UK, similar to the market entry of retail funds in Australia, a new crop of providers has recently appeared on the scene, attempting to buy off savers with eye-catching signup deals and cashback offers, the promise of improved user experience, and the offer to help consolidate old pensions. Some savers may find that tempting, and indeed for a minority of savers it may make financial sense. For many – indeed most – it does not.
The reality is that workplace pensions often outcompete non-workplace pensions on fees, thus improving value for money for savers. Funds for auto enrolled employees cannot charge more than 0.75 per cent in annual management fees, with most new workplace schemes at below 0.30 per cent. While we cannot use the past performance of funds to predict the future, what we do know is that fees are fees regardless of how markets perform.
Importantly, large workplace schemes are governed by experienced industry professionals through trustee boards or IGCs, ensuring that value for money for members. This is only set to increase under recent proposals set out by the pensions minister. Most default funds therefore contain a mix of sustainable, diversified growth funds to deliver the investment objectives of its membership base. In contrast, many new retail Sipp products use purely passive funds that in theory should deliver lower charges than a workplace pension, but don’t.
We need to make the impact of charges simple to understand. The difference between 0.3 per cent and 0.8 per cent sounds negligible for most customers. But when discussing large sums and their performance over long time horizons, it is meaningful.
That’s not to mention some of the other unique benefits that workplace auto enrolment offers – most notably, enabling employers to contribute their minimum 3 per cent of gross earnings. For employees, that is effectively free money. A further worry is that there are pension savers opting out of their workplace plans to consolidate their savings elsewhere who are unaware of what they are missing out on.
The government’s consultation on a new VFM framework for DC pensions embodies a drive towards making pension information easily accessible, enabling savers to make better choices. The workplace pension industry needs to work collectively on a number of issues, but none are more important than this. If we get this right, we can create an informed population of future retirees, spur on industry competition, and help deliver value for money for our savers.