Everything that goes around...
If you’re my age you’ll remember the advert in the 1980’s, in which working people were sold the benefits of breaking the chains that tied them to their company scheme; so that they could sprint off into mis sold personal pensions. Poetic licence? Maybe, but you know what I mean.
That wasn’t the first government initiative to result in an unforeseen outcome. And it won’t be the last. But it was a significant straw that contributed to the breaking of the workplace pensions' sector's back. A sector where employers took pride in the quality of their workplace pensions and employees were quietly protected against the event that they most avoided thinking about: old age.
I haven’t had time to count how much has been spent on the Pensions Commission and the activity since. What I do know is that thanks to Charles Counsel and his team at The Pensions Regulator and some heavy lifting in the pensions, payroll and advisory communities, automatic enrolment was starting to become the government project to change the mould. More than 6 million people enrolled in pension schemes by over 100,000 employers and survey evidence that auto enrolment is increasingly welcomed by employers and staff alike. The perfect Launchpad from which to encourage more than a million and a half small employers to put pension schemes back at the heart of employee benefits and make serious inroads into the national savings deficit.
Enter the Lifetime Individual Savings Account: LISA
I can’t think of a worse time to divert the attention of “hard working people”. I can only assume that the governments’ vision is of a society where everyone owns a home that, when they get old, they can’t afford to heat.
This is an extract from the Pension Commission’s report:
“But reforms to the state pension system will not be sufficient because of:
– The inherent behavioural barriers to people making rational long-term savings decisions without encouragement;
– The limited impact of providing better information and generic advice;
– The decreasing belief among many employers that there are self-interested reasons to provide good pensions to achieve recruitment and retention objectives; and
– The cost barriers in the currently underprovided market. There is a segment of the market, employees of average and lower earnings working in small and medium companies, plus many self-employed, which the retail financial services industry cannot serve profitably except at Annual Management Charges (AMCs) which are disincentives to saving and which substantially reduce pensions available in retirement.”
I really don’t see how the LISA reflects these key findings.
The most fundamental behavioural barrier is that it takes trust and confidence to lock away your spare cash for 30 years or more. The sweetener that makes it happen is the employers’ contribution and the belief that if your employer is signed up to it and does the leg work for you, it must be a good thing.
The impact of providing better information and generic advice will always be limited. Automatic enrolment makes the decision tree simpler. To solve the problem of having money in retirement you stay in your employers’ pension scheme. Simples. When you add a second choice, you also increase the incidence of people taking a third: do nothing. The decision is too difficult. "I’ll think about it tomorrow".
There is real danger here that there will be people who see access to their funds as being more important than the employers’ contribution. That people will opt-out and employers will go back to believing that there are no self- interested reasons to provide good pensions.
And how long will scheme providers stay engaged? Lower contribution levels and a tide of opt-outs won’t exactly enhance commercial attractiveness in a provider market that has, against all the odds, been growing. Until now any way.
LISA offers the potential to claim defeat from the jaws of victory. I can only hope that the government manages to prove the Pensions Commission wrong and provide better information and generic advice that for once, delivers the outcome that it’s expected to.
The opinions expressed in this article are the author’s own and absolutely do reflect the views of Kent Pension Services Ltd