Wrong turning. Photo: Ken Wiedemann
The government takes a wrong turn on workplace pensions
On a day when official statistics revealed another welcome hike in the number of people saving in pensions, the government has just made it harder for savers when they reach retirement.
Now, 68 per cent of employees are in a workplace pension scheme. This number is still insufficient and it is clear that part-timers and low earners are missing out. But workplace retirement saving, with employer contributions, is swiftly being established as the norm.
The vast bulk of these savers (some 55 per cent) are being enrolled into defined contribution schemes. These don’t guarantee a certain income at retirement. Instead the pot of money produced is reliant on contribution levels and market returns. And, especially since so-called pension freedom changes, the saver then has to decide what to do with this pot at retirement.
So how does the saver know what is a sensible approach? The answer is that currently they don’t. Most DC savers drift into cashing in their pension or buying expensive “drawdown” products that leaves them at risk of running out money later on.
An alternative was in the early stages of development by state-backed NEST. It offered an appealing mixture of flexible access to cash and a guaranteed income for life. Yet, on the day we are told of ever-expanding numbers of DC savers, the government made the baffling decision that NEST would not be allowed to offer this to savers.
In its response to the consultation on NEST’s retirement offering, the government highlighted the “reassurance we received from the industry regarding their intention to innovate”. What is absent is any evidence for this reassurance. Indeed, a few paragraphs later it noted that: “Whilst providers are introducing new products, we received limited evidence that suitable hybrid products aimed at the mass market were available or in development at this stage”.
The pensions industry is notoriously bad at innovating in the interests of low and middle income savers. Products are complicated, savers’ knowledge is limited, and the industry prefers to focus on wealthier savers from whom more money can be made.
There is certainly no obvious driver for developing – at a fair price – retirement products that ensure that people, especially those on lower and middle incomes, don’t run out of money in old age.
And, I think this is the most important element, how are we to develop the pathways that guide savers? We have established effective nudges in the saving stage via automatic enrolment. We need similar signposting so that your standard saver knows what is a sensible approach for their post-retirement savings.
NEST has shaken up the pensions industry with good value, well-researched pension scheme for savers. Its rivals were quick to develop their own high quality offerings.
NEST could have provided the same impetus to the at-retirement market. But instead a government too cowed by vested interests has pursued an option that is safe politically but anything but safe for savers reaching retirement in the coming years.