Everything comes to he who waits. Unfortunately for the pensions industry, and UK employers, it’s all come at the same time.
Auto-enrolment may have just started, but it is only one player in a game with a set of rules that are fast becoming extremely complex. Other game-changers include the introduction of the Retail Distribution Review, the ongoing economic gloom, incredibly low levels of pension savings as demonstrated by DWP figures, and last year’s abolition of the Default Retirement Age.
Make no mistake, these changes are seismic and will significantly change the direction of travel of pensions. So as we all line up for a new turn around the pensions savings board, let’s try and envisage how this latest throw of the dice might influence the industry, and the savings gap, over the next few years.
Firstly it should be recognised that whilst legislation is often well intentioned, the results may not always be as expected.
On the plus side, and for the first time in a while, pensions are likely to be a positive topic in the media over the next couple of years. Indeed, the headline news story on the 1st October was the commencement of AE. Furthermore, the RDR will ultimately lead to a more professional pensions industry.
But these positives are likely to be significantly outweighed by other factors.
Whilst the UK will bost a larger population of pension savers, the levels of savings are likely to be much lower than needed, and the engagement levels even lower. The new savers are, after all, being effectively compelled to join, and few are going to welcome the impact on already stretched pay-packets.
It follows that for many, perhaps most savers the legislation-dictated savings levels are unlikely to change for many years, if at all. This could, and probably will, lead to poor retirement outcomes and plenty of negative media headlines.
So there is likely to be a dangerous level of inertia, possible resentment, and perhaps even a little boredom from the new saving population.
This was always expected of course, but it was probably assumed that the pensions industry, and employers, would make the next moves to alter this perception. But this expectation may well have been overtaken by events.
Employee engagement and the resultant higher contribution levels have often been driven and delivered by the pensions industry. The industry is extremely experienced in such communication strategies, but this time and expertise has had to be paid for. Historically many employers have expected these services to be funded via commission payments. Given that the commission-flow tap is now about to be turned off, this leaves a bit of problem. For many the answer seems deceptively simple: Let the employer pay fees for these services instead.
Yet the fee conversation is a difficult one right now, given that employers are facing multiple costs on the pension front. Not only do employers have to meet the contribution costs required by legislation, but they also have to fund the administrative kit to ensure they comply with the complex new duties. Many employers also remain in delicate financial health following the economic downturn, and therefore have limited funds and personnel to ensure compliance with these duties. Put simply, employers almost certainly need professional help in this area, but there may not be the funds to provide it.
The real problem here is that if employers and employees alike merely comply, rather than engage, with the savings message, then all of these changes will have been to no avail. With rampant life expectancy figures, poor recent investment returns and painfully poor annuity rates, the savings gap has the potential to morph from a problem to a crisis in the UK.
It’s hard to escape the conclusion that the legislators really need the industry working at maximum efficiency and capacity to maximise the positive interest in pensions. Yet, ironically, the timing of RDR chokes-off much of this potential. A rather special own-goal that one.
Just as it always has, the pensions industry will survive, adapt, and flourish in the post auto-enrolment and RDR worlds. But it’s likely that the financial constraints of the new fee world will push much of that industry expertise away from small employers and their employees. Which is a shame, given that they need our help as much, or arguably more than, many others.