With the General Election countdown now well and truly underway we can expect a considerable focus on the industry’s policy asks from the main parties. This will inevitably include demands for a new pension review along the lines of Lord Turner’s ground breaking work in the early years of this century.
For my money what we need is a financial resilience review. Yes auto-enrolment pensions, contributions, tax relief, decumulation and a host of other issues need to be looked at again. It is now 20 years since Lord Turner first looked at these issues and things have moved on.
But as we have learnt from Covid and the subsequent cost-of-living crisis (not that these problems weren’t already there), many people are facing significant financial wellbeing challenges that are are equally or in some cases more pressing.
The pensions industry has for some time now being congratulating itself on the fabulous behavioural journey that has been created to take individuals from education to retirement in a way that painlessly helps them save for retirement.
But for some, particularly those on course to be renting in retirement, the famous nudge that has taken their money from their wallet without their overt permission may not be in their best interests. I am talking about the unfortunate but significant group which will ultimately end up reducing the amount of housing benefit they receive, but not increasing their retirement income at all.
Richard Thaler and Cass Sunstein’s book Nudge describes how organisations and governments can frame decisions so individuals retain free will but make the right choice. A future financial resilience review would consider whether the auto-enrolment into pension nudge was the optimal solution, or whether nudges into other products, such as sidecar savings might be better or complementary solutions.
Bringing in another bit of American psychology, Maslow’s hierarchy of need places the physiological needs of food, water, shelter and rest as the foundation, ahead of all other needs. The Treasury argues that UK savers’ pension money could serve them better by being invested in the country they live in. That is arguably true – but by that same logic, investing it in their own homes delivers even greater utility.
You could debate at length alternative European approaches to renting and rent controls, but in terms of financial resilience for most people in the UK, and life generally, owning a home fits very much into that first foundational level of needs – so why not bring the debate towards the concept of creating nudges that help people to be able to buy a home of their own, and reduce their indebtedness. It’s not all about pension.
This could be through early access to pension for first home deposit, or through a sidecar savings solution.
Auto-enrolment has been hugely successful in showing the power of nudges – my ask to politicians would be to extend its scope beyond pensions to the other big financial decisions people struggle to make on their own, with debt management and housing the priorities.