Pensions World

Compelling people to save is the only answer to the pensions crisis, says editor, Stephanie Hawthorne

The UK retirement savings deficit is a staggering £9 trillion according to a recent Chartered Insurance Institute report.

However, major reforms are under way with the arrival of auto-enrolment and Nest in 2012. Will these be enough to solve the looming pensions crisis? They are a start, with the possibility of up to eight million new savers, but many will opt out when they see deductions for the first time in their pay packet.

Pensions experts are placing too much faith in inertia as the answer to the urgent need to encourage more saving. Nudging us to do the right thing is not enough. In my experience, young graduates, even specialists working on a pensions magazine, nearly always turned down generous company contributions and rarely joined the pension scheme. Yet the magic of compound interest means long term saving is the best way of making retirement provision.

Reluctantly, I think the blunt instrument of compulsion is the only answer – when I worked for the Financial Times Group in the 1980s, employers were allowed to make it a condition of service that all employees joined the pension scheme. In my carefree twenties, I would certainly not have given pensions a second thought and probably not have joined, but I was compelled to do so. Today I am so glad that I did!

All UK employees over the age of 22 and the self-employed should be compelled to contribute to a suitable pension scheme of their choice, initially at the level of the government’s own pension reforms, but gradually over the years when the nation can afford it – and can it afford not to act? – with joint employer and employee contributions rising to 15% plus tax relief.

Nobody likes to think of old age and future poverty in their carefree youth – it is a long way off and the stock response is that the state will provide, but who knows what the future will bring or what the nation can afford?

From those who are already saving for retirement, there is no room for complacency.
On average, pensioners only achieve 30% of their pre-retirement salary during retirement. This is significantly less than the 70% figure which the OECD believes is necessary to live adequately. However, living comfortably on a day to day basis is not the only consideration for pensioners. The UK’s elderly are increasingly requiring long term care and many also have to pay debts. Here compulsion may stop the spendthrift.

We need better products

If people are compelled to save, financial services companies must also raise their game to make sure their products are worthwhile and are good value, that charges are reasonably low and that there is plenty of advice and information at a low cost and not just of the sort to satisfy the regulators or lawyers. Who reads all the product information when buying a pension? There are pages of it. No-one has time for all that and, furthermore, rather than help policyholders, it can often confuse them even more.

The government, with cross-party support, should also run more advertising campaigns on the need to save. However, these could backfire – the only state savings campaign that I remember was the one at the launch of personal pensions in 1988. Sadly, it just encouraged people in droves to leave good final salary pensions for inferior and high charging personal pensions.

This is one subject we must not put in the “too difficult” or “unpopular” file just because the savings gap is huge and the remedies are expensive. If employers, individuals and the state act together, we can resolve this crisis.

stephanie.hawthorne@lexisnexis.co.uk