The pension men cometh

Saving for a pension has always been a paradox.  Everybody pretty much knows you should in some form or other, but there are always several different obstacles in the way, the main one being that the best time to start this exercise is also the time in your life that you have the least chance of doing so (when you’re young).  Then when you near retirement age, more often than not, it’s too late and you rue not putting enough money aside in a pension vehicle of some sort in the first place.

The above will ring true for some, but this can only be so for those who were conscious of these facts at a time when they could take action.  Two things can alter this state; the first could be receiving some sort of financial education in younger years. The second is having someone else make the decisions for you before it’s too late.  The British government has gone with the latter route.  Well, sort of, because people will be able to ‘opt out’ if they wish, but more on that later.

From 1st October 2012, new employer duties are planned to come into force, whereby employers will have to enrol eligible workers into a qualifying workplace pension arrangement (Auto-Enrolment), and thereafter choose the qualifying pension scheme which comes with the new duty.  The choice will be to either make a minimum three percent contribution towards a defined contribution scheme (overseen by the company and their consultants/client managers from an asset management company for example) or NEST (the National Employment Savings Trust).

NEST will be a new, supposedly simple, low-cost defined contribution-occupational pension scheme. Defined contribution (or money purchase) is the transitional focus of the pension industry from defined benefit structures due to the transfer of risk from the employers to the employee. It will be trust-based, i.e. has a board of trustees, who superintend its functionality, and the NEST Corporation is a non-departmental public body that operates at arm’s length from government and is accountable to Parliament through the Department for Work and Pensions (DWP). The charges for being forced into NEST will be 1.8 percent of the value of each contribution to cover NEST’s start-up costs,
and an annual management charge of 0.3 percent of the value of the individual’s pension fund.

If the employer decides to be more paternal or already has a company pension scheme in operation, Auto-Enrolment will direct eligible employees (which is an employee aged between 22 and state pension age and earning above the income tax personal allowance (£7,475 in 2011/12)) automatically into their employer’s qualifying pension scheme (which has to meet certain minimum standards) without any active decision on the employee’s part.

The reasoning behind this idea is that there is a significant shortfall in pension saving in the UK. Many workers do not join their company pension scheme because they simply do not apply. It’s too difficult and unmanageable to place a pension saving duty on each individual in society, as not everyone can make decisions that require knowledge about complicated financial products. Furthermore, not everyone is in a position to contribute in the first place.

However, the way around this is seen as requiring employers to act as the conduit through which retirement saving is forced. Through tax records, Government can see those employees who they know legitimately earn sufficient amounts as they deem appropriate to save for retirement, and thereafter impose on them the duty to put money aside for themselves, rather than the State pay the bill for their pension/care needs when they stop working.

Auto-Enrolment brings positives and negatives in my opinion. I’ve written and presented items on financial education in the past, and I am indeed still passionate about this matter. Yet it is much easier said than done. In my opinion, the place to make people become more comfortable with financial matters is the place we all become more comfortable learning information, in school, when the pupils reach an appropriate age. At the moment, this is still something mentioned in passing every now and again when people discuss financial matters and why the population finds them confusing.

Individual Savings Accounts (ISAs) are incredibly popular due to the fact that they are deemed simple savings products with tax advantages over normal savings accounts. In truth, although pensions are more complex, the bare bones of them are that you have a savings or investment vehicle with better tax advantages, you just can’t access your money until you reach a certain age. But until characters in soap operas start talking about them, the public will not begin to be engaged because they are not made to. You can take an ISA out at the age of 16, but you have to teach yourself about it unless your parents do it for you. So, we have the situation being proposed now, whereby everyone joins whether they initially want to or not. Interesting fact: at the start of 2008, there were an estimated 4.8 million private sector enterprises in the UK. Small to medium-sized enterprises (SMEs) accounted for 99.9 percent of all enterprises. 99.3 pecent of this 4.8 million had less than 49 employees, and drilling even further, almost 4 million of these SMEs were actually self-employed entrepreneurs. The owner/manager of a small business started the business because she thinks she can earn more money than she can in her current job. She’s thinking about putting food on the table and enjoying a better lifestyle now, not when she retires in x number of years. Even for those that are thinking about a pension, that’s still only a luxury for the future. Equally, for the businessman running a reasonable enterprise with seven staff, he now has to take the time and pay the fees for ensuring the people working for him, bearing in mind very few jobs are for life nowadays like in generations previous, receive retirement benefits when perhaps the SME has long disappeared (either through sale of the company, dissolution etc.). Is this fair? Is this workable?

I mentioned earlier that opting out is an option.  Workers who give notice that they do not want to participate during the formal opt-out period will be put back in the position they would have been if they had not become members in the first place, which may include a refund of any contributions taken following automatic enrolment. So after all of this, they can leave after a period of time anyway? Could be a nice earner for the pension consultants!

Apologies if I seem over cynical. I like pensions, I really do. I understand people’s distrust of them; defined contribution pensions are not guaranteed, and can therefore seem like a gamble, a gamble with a large amount of savings. Yet this need not be so. Auto-Enrolment has its heart in the right place, and people often need others to take control of matters like pensions on their behalf as there are always reasons to put it off – that’s life sometimes.  But for the SMEs, will it be a help or a hindrance? My fear is the latter. My opinion is that education and empowerment are the foundation to the pension gap Britain faces. I always relate pensions to smoking or drugs, except in the reverse. Not putting money aside for old age can cause long-term damage. The play The Iceman Cometh is about empty promises and pipe dreams. For some, NEST and Auto-Enrolment will work. For the rest, it may just be Much Ado About Nothing.