Pensions World

Smaller firms are the weakest link in pensions. How can we strengthen provision? asks editor Stephanie Hawthorne

Only a third of smaller firms – those with 250 or fewer employees – provide any kind of pension scheme, according to the Association of Consulting Actuaries’ (ACA’s) latest survey. Even where there is a pension scheme, on average 40% of employees choose not to join. This does not augur well for the 2012 reforms when employees will be auto-enrolled in a pension scheme: some commentators are forecasting an opt out rate greater than 30%. So, sadly, the pensions crisis has no end in sight.

Today, defined contribution (DC) pension schemes run by smaller firms are attracting combined employer and employee contributions of less than 8% of earnings. This scarcely provides even a meagre pension. Pension contributions need to double on average to at least 15% of earnings to achieve a reasonable retirement income.

It is extremely worrying that the minimum levels of pension contributions (combined 3% employer and 4% employee of salary) under the auto-enrolment policy are so modest. If these levels become the norm, emerging pensions will be disastrously low.

Yet some people who can afford to save are not doing so – the whole climate of pensions must be changed so that no-one who has spare cash is deterred from doing so because of apathy or a lack of trust or even high charges. It is disturbing that if a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50% higher income in retirement. The recent RSA report (see page 23) shows that a huge proportion of our pensions disappears in fees swallowing up to 40% of the final pension. Such high charges are demotivating, particularly if the investment performance is disappointing, and it does not take much to deter people from locking up money for 40 years.

Pensions must be seen to be good value otherwise the instant appeal of a new car or exotic holiday will win every time against the costly and uncertain promise of a retirement income a lifetime away.

An image makeover

Pensions need an image makeover. Telling 21 year olds with £30,000 of university debt to contribute to a pension where their money is locked up until the age of 55 is likely to be a waste of breath and print and indeed, to many, feels like a tax. Perhaps early access to pensions will improve take up. The ACA survey said many employees did not join mainly because of cost (84%), although two-thirds did not join because firms felt employees “were disillusioned with pensions.” The phrase “good news” is hardly synonymous with pensions – there have been so many scandals that it is not surprising that people do not trust pension providers.

Perhaps the various pension associations or the life offices could campaign together to show that if you save a reasonable amount early enough a good pension could result. It would be great to see more case studies in newspapers of ordinary people who have saved for years, particularly with DC contracts, and ended up with a good retirement income – and hats off to Nest for using the phrase “retirement income” in its literature rather than the word “annuity”. There is so much jargon in pensions it is just one more barrier to stop people saving. HM Revenue & Customs is also largely responsible for much of the complexity because of its preoccupation with tax avoidance, changing the rules nearly every year so people cannot plan ahead.

Employers need new rewards for boosting their pension contributions and greater freedom in pension design. Greater transparency, low cost products and more affordable advice will help, as will better consumer financial education. As the economy improves over the next decade, pensions must be given a top priority. The security of our old age is at stake.

stephanie.hawthorne@lexisnexis.co.uk