Pensions – When 8 per cent is not enough

Everyone in the pensions industry knows 8 per cent is not enough. But what about the rest of the population? John Lappin reports

With auto-enrolment set to cajole the majority of British workers into pension saving, a new front in the battle to get Britons savings will open up. The question will be less about whether to save at all, to how much. As auto-enrolment rolls out, ‘8 per cent is not enough’ is set to be one of the key messages from pensions providers and advisers.

Most pension industry professionals say that auto-enrolment’s 8 per cent total contribution level is the bare minimum for achieving anything approaching a decent retirement income, and then only for those starting saving from their early twenties. For providers, advisers and employers, increasing uptake is set to be one of the key challenges of 2013.

Pensions Management Institute technical consultant Tim Middleton sums up the position. “The key message the public needs to understand is that the 8 per cent figure is supposed to be starting point for retirement saving. There is a risk people assume that 8 per cent of their band of earnings is really going to be adequate for retirement saving from any age.

“The grim reality is that people will need to save far more than the statutory minimum in order to have a realistic prospect of a comfortable retirement. And the later they leave it the more they will have to save.”

The Association of British Insurers head of savings and retirement Dr Yvonne Braun says: “Auto-enrolment is a real opportunity for millions of people to break the savings stalemate. Saving early and saving more make the biggest difference to the size of someone’s pension pot. Increasing contributions from 8 per cent to 12 per cent for example, can increase a pension pot by about 50 per cent.”

But as the pensions industry, government and regulators grapple with the technical and administrative challenges of pension reform, is it possible to get the message through to employers and employees?

Some experts believe that with so much reliance on defaults, the message that 8 per cent is a minimum could fail to get through.

Lift Financial head of corporate pensions Noel Birchall characterises this as a risk of double defaulting where people are defaulted into a pension, but then believe the ‘default’ minimum contributions means the box is ticked for their pension.

Hargreaves Lansdown’s head of pensions research Tom McPhail points out that the small pots initiative is only the latest initiative reliant on defaults. He says: “The notion that you can default someone into a pension, give them a default contribution rate, a default investment choice and when they change jobs, by default, the money will follow them is all quite seductive. The risk is people will sleepwalk towards an impoverished retirement. They will get there and find there is not enough money.”

McPhail says the answer lies with engagement. However he says the industry needs some help from regulators to allow simpler, shorter but more effective communications. For example, when people leave an employer, it should be possible to tell them exactly where they stand and give them opportunity to transfer easily – preferably electronically.

More broadly, he says, engagement is the key. “We have got experience of going into the workplace and doing seminars, not regulated advice, but good quality communications.

“It increases participation rates, increases contribution rates and increases active investment decision making. It ticks all the boxes we need to get good pension outcomes.”

However McPhail says the engagement issue could get caught up in the arguments about cost. “How much do we think is an acceptable price for the engagement that everybody thinks we need. Price has become an asymmetrical debate. It is almost ‘low price at any cost’. The debate should be how much are we prepared to pay to improve engagement?”

Birchall says that once an arrangement is in place, the pension industry has been terrible at going back to people to get them to increase their contributions, though common sense approaches could increase levels.

He says getting employees to be aware of the amount that triggers the maximum employer matching contribution is one.

But he would also advocate getting employees to agree to contribute 1 per cent of the next pay rise to their pension which is a relatively painless way to build towards a reasonable level of contributions.

Other experts such as Middleton and Aegon regulatory strategy manager Kate Smith see a great deal of merit in what is known in the US as Save More Tomorrow.

Birchall remains concerned that regulations around disclosure mean that in the UK it is still a relatively cumbersome process and hasn’t worked as well in practice as people might have hoped.

However Shilling Communications consultant Steve Sykes says his firm has been running successful campaigns around putting away an extra 1 per cent backed by tools such as calculators and more general information about finances. He says, the industry needs to make it is easier for people to understand. “Everything is talked about in percentages but what does it mean in pounds and pence?”

Mercer principal DC speciality group David Barker says the industry can put too much emphasis on contributions and not enough on outcomes.

He says: “The problem is if you ask a pension professional how much I should contribute to a pension scheme, the answer is more which is not very helpful.” He says the industry needs to bear in mind that the Pension Commission’s original paper sensibly placed a lot of emphasis on the income replacement ratio.

Barker suggests that for £10,000 earnings you may need 80 per cent, but why should someone on £50,000 or £100,000 need two thirds of pre-retirement income in retirement. Why not 50 per cent?

“Unless you have an objective target how can you advise on contributions? We are trying to encourage people to throw large amount of money without knowing what they are aiming for,” he says.

However he suggests that group presentations may be enough to get the relevant information across to most people.

There are some signs that public awareness is increasing. Scottish Widows corporate pensions senior manager Lynn Graves says: “You could say 8 per cent is the new benchmark. But does it give you enough? We would argue not. Our research suggests people are becoming more aware of that and becoming more realistic about what retirement is going to cost them.”

She says the latest Scottish Widows pension report suggests just 10 per cent of the public believe 8 per cent will deliver a comfortable retirement, 39 per cent a basic but acceptable retirement while 33 per cent believe there will be a gap.

“That is encouraging. The challenge is to get them to do something,” she adds.

Legal & General pensions strategy director Adrian Boulding believes the industry is neglecting one very simple message. “We don’t spend enough time on the tax relief. Nobody likes paying tax. If you put money in you get full income tax relief at the marginal rate – 20, 40 or 50 per cent. We should major on that and on the NI saving as well. A number of schemes will do salary sacrifice so you can avoid paying tax and NI as well. We should be ramming home the message that you can get some money back from the tax man and stop some money leaching out to the Treasury.”

Birchall says there may be a need for a national debate about savings before even getting to pensions.

“If you do put something aside, at the very least, you’ll have choices. You can retire or perhaps continue part time. If you don’t do it, you will have to work until you are ancient.”

But does that mean a national advertising campaign? Advertising consultant Lucian Camp, of Lucian Camp Consulting, finds it very difficult to envisage.

He says: “It is difficult to advertise especially in the short to medium term because the introduction is being phased over such as long period. For several years if you do advertise, the advertising is meaningless for many people, because it hasn’t reached them yet. There is a danger of creating a great deal of confusion if you roll out a campaign where only people working in the 100 biggest companies have the faintest idea what you are talking about. With the levels on an automatic escalator, the message is even more difficult to tell people they should accelerate their contributions faster than they are being accelerated by the Government.”

Camp is generally cynical about pension advertising, given the uncertainty of outcome. However he sees one possibility.

“One angle might be that we have the ultimate BOGOF. Buy one get one free. People do like BOGOFs. In retail, they are controversial involving too many crisps or bars of chocolate, so perhaps this is the first benign BOGOF.”

Should the poor value available from annuities also figure?

Sykes says the issue can’t be ignored but he thinks certain fundamentals still apply. “You have to try to keep a consistent message. ‘If you keep making contributions, you are taking advantage of employers’ contributions and tax relief.’ But you have to be honest and tell people that to build a sufficient pot, to generate an adequate income is not easy, the earlier you start and more you put in, the better your chances.”

The job is made even harder by the negative media coverage. Camp suggests this makes any advertising all that more difficult. Barker is frustrated that the media also ignore the issue of what people are actually going to retire on.

Sykes says part of the answer rests with getting a message that resonates with individuals.

“The answer is to get people to avoid the noise, and realise this is about you and your family and your financial future,” he says.

But is there any realistic chance of persuading employers to contribute more?

Birchall has just contributed to an Institute of Directors’ guide which will warn employers of the long term disadvantages of their workforce not being able to afford to retire.

He says that a combination of low DC contributions, a rising state pension age, and no default retirement age could see employers with large numbers of workers wanting to stay on. Not all will want or be able to take the B&Q approach.

Birchall says: “We have to ask can employers help their employees to help themselves? It’s great if they can increase their scheme contributions. Few can afford to do that. But if you do your engagement and make employees more aware, then perhaps you can achieve the same objective.”

Middleton says it will require an upturn in the economy before the better employers start competing in terms of using better pensions and matching offers to compete for staff. But he says it is important employers get the message out at least for employees to save more.

Barker says it is difficult to tell how small firms previously without pensions will react, but generally he had found employers won’t want something to be simply a cost. They will usually want to see some value from it.

Syndaxi Chartered Financial Planners managing director Robert Reid advocates more dramatic action to incentivise or cajole employers. He says: “We could do away with tax relief for the basic auto-enrolment contributions for the employer and they only get tax relief on a higher level of contributions with the proviso that they educate staff.”

However he is also concerned whether IFAs or EBCs are up to the general task of convincing employers to do more.

“You have to start talking to people who engage with these issues with SMEs. It is the difference between pure and applied mathematics. You have to get an on-going dialogue, though I am not entirely convinced the IFAs or benefit consultants have the skill set to get things to change. It is sad if all you are doing is compliance.”

Of course, another school of thought is that it is necessary to get auto-enrolment working first.

Barker says: “The whole logic of AE is that you don’t want people to go away and read loads of stuff. By having money going in, as it grows, you would hope they would pay a bit more attention and start thinking about it.”

Graves says: “It needs to be a two stage thing. We need to get over the bulk of auto-enrolment, and the longer term piece is education and awareness and how we move people away from the default position of 8 per cent.”

Smith says: “We have to be quite careful not to put people off initially, because people might opt out. If people feel 1 per cent is too much, they may feel 5 per cent is too much. We need to get the message out at the right time, position it as a starting position, build it up, but with very positive messages about saving.”