The British pensions industry is gifted in making things more complicated than they need to be. But at its most simple there are two parts: the building up bit, and the spending bit.
Since changes brought in six years ago, the spending bit has been radically liberalised. No-one can stop you cashing out the lot, sticking it in a bank account, withdrawing it from an ATM and leaving it under your mattress. Alternatively, you are free to invest 100 per cent of your life savings in a single risky share a day before the company goes bust and watch the share price go to zero.
Strangely though, the building up bit of pensions remains in a straitjacket. Yes, you can invest in the weird and wonderful in a Sipp, but your workplace pension – where you will likely build up the bulk of your savings – is tightly controlled.
There are good reasons for this. To protect the millions of new pension savers created by automatic enrolment, the Government imposed strict rules on the kind of schemes employers can use to hold their staff pensions. For most people, having the insurance company or scheme trustees decide your investments for you is absolutely right. For those of us with more than a passing interest in investing, this can be incredibly frustrating and can genuinely mean the difference between retiring decades early. For starters, employees do not have any say over what pension provider their company picks. Most of the big providers have a very limited range of funds with some – like Now: Pensions – giving you no choice at all over where your money goes. That leaves millions of people helpless to the performance of often their biggest financial asset.
For fear of scaring young, timid or inexperienced savers, some providers prefer “low volatility” strategies, which means they generally don’t take enough risk and will almost certainly underperform the return on the stock market. While there’s a chance some people will decide to stop saving entirely when things get choppy – though there is no evidence I’ve seen suggesting this – the bigger risk is that their pot trundles along making mediocre returns for decades. Corporate Adviser’s annual analysis of master trust and group personal pension default fund performance invariably finds huge variation between the best and worst performers.
There is nothing in the rules stopping employers using pension providers with a broad range of investments. But, at the moment, individuals do not have a right to ask for their money to be directed to somewhere more appropriate. A handful of enlightened companies happily pay contributions into group Sipps, but these are few and far between.
A year ago I might have been sceptical about how many people would, if given the opportunity, plump to move their cash away from a company plan into a DIY arrangement. Daily Telegraph readers would be keen, no doubt, and those working in the City.
Yet I think this is another thing completely altered by the pandemic. All the major fund shops have scooped up lots of new, young customers over the past year or so. The Reddit/ GameStop phenomenon coupled with eons of spare time – and in many cases oodles of spare cash – has been the perfect environment for newbie investors to get hooked. You might argue that if markets really tanked this new generation of stock pickers would disappear overnight, but I’m not so sure. The rise of mobile brokers claiming to offer ‘free’ trading – the cost is in the bid/offer spread, of course – has found an eager user base which is comfortable managing their own money.
So, how realistic is it that the Government would extend the hugely popular pension freedom reforms to the building up bit of pensions?
Tom Selby, of AJ Bell and my old boss, spotted a glimmer of hope recently. In a technical consultation on fees, the Department for Work and Pensions is asking how employers feel about ‘paying a contribution towards employees’ pensions, where an employee may wish to… switch to an entirely new provider’. Giving more power to pension savers is low down the Government’s agenda – it’s more interested in paying lip service to the wave of ‘ethical’ investing strategies currently being pumped out by asset managers’ marketing departments.
If it did happen, it would be a great step towards liberalising the workplace pensions market and giving savers the choice they deserve. If we trust workers to make decisions after retirement, which are arguably more complicated and potentially ruinous, then we should trust them to build up their pots as well.
Asking the question is a step in the right direction. Now, it’s time to complete the pensions revolution.
