Over the past 10 years, government policy has handed the pensions industry billions of pounds. Auto-enrolment (AE) has seen millions of new customers benefit from ‘free money’ in the pensions wrapper.
We all understand the enormous advantages of investing in pensions. They are a brilliant product, with generous tax breaks and additional money not available to most Isas or other investment accounts.
The market for customer-focused investment approaches is still wide open
However, the AE programme has relied on automatic payroll deductions of workers’ money, without any understanding of investment details and relying on the employer’s chosen provider for suitable products.
The failure of stakeholder products — partly due to historic pension scandals, complex jargon, regulatory barriers and a lack of financial education — clearly indicated the need for behavioural nudges to improve pension take-up across the population. But, despite unexpectedly low opt-out rates, there has been little advance in customer engagement or product development for these new pension investors.
This is puzzling given the context of radical pension freedom reforms from 2015. Although elements of these changes remain divisive in some corners of the advice sector, the reforms have made pensions far more flexible and potentially better suited to later-life financial planning and changing retirement patterns.
Most workers in their 50s and 60s have no idea their money is switching out of higher expected-return assets for about 15 years
Ending mandatory annuitisation and traditional drawdown restrictions could have paved the way for people to pay into pensions for longer, and mandatory employer provision could have provided lower-cost means of engaging, informing and serving customers in the workplace.
The industry has had a tremendous opportunity to reach out directly to millions of new or existing customers; helping them to understand all the benefits of pensions, encouraging them to contribute more and explaining about the extra ‘free money’ available — from possible employer matching and tax relief — when adding to the legally required minimum contributions.
Unfortunately, this has not been seized upon as many experts hoped.
Potential product improvement
Pension providers do not seem to have grasped this golden opportunity to design better products to cater for a different work-and-pensions landscape. They have not risen to the challenge of engaging their customers and promoting pensions.
Yes, there have been governance improvements and movement towards ethical, environmentally friendly ESG investing. But these changes do not mean much to the uninitiated investor and new types of drawdown, such as flexi-access and uncrystallised funds pension lump sums, are hardly likely to excite popular interest.
Despite unexpectedly low opt-out rates, there has been little advance in customer engagement or product development for these new pension investors
The industry has not succeeded in engaging customers at either accumulation or decumulation stage. More suitable pension products and direct-to-consumer solutions are missing.
Flagship offerings for most AE schemes are still their ‘default’ funds. Marketing advisers would surely suggest consumer-focused companies steer clear of this word. Why would anyone outside pensions think putting people’s money into something that offered ‘default’ was an attractive, customer-friendly proposition?
We may all understand this jargon but does it add positive value? At least ‘standard’ funds or ‘expert’s choice’ may have some positive resonance.
21st century lives
Most of these so-called default funds are still just lifestyling or target date, which will be unsuitable for many customers. Where are the attractive new approaches to fit 21st century lives?
Most workers in their 50s and 60s have no idea their money is switching out of higher expected-return assets for about 15 years, which could be entirely wrong for them. Gearing their funds to a date selected many years previously, which may not be the date at which they actually retire or need to draw their pension, without any requirement to review it regularly, is unwise.
The industry has not succeeded in engaging customers at either accumulation or decumulation stage
Switching mostly into cash by this date is probably unsuitable for those who will work longer, or keep contributing, and for those who will not buy annuities or will keep most of their money invested in drawdown products for several years. They would be better off with just 25% cash and the remainder staying invested, but are not told this.
The big opportunities of AE have been missed. The market for truly customer-focused investment approaches, engaging individuals with their money and helping them to build better pensions over time, remains wide open. Hopefully, exciting new approaches will evolve soon.
Ros Altmann is a former pensions minister
This article featured in the May 2022 edition of MM.
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This aritacl confirms Ros, you have no idea of Financial Advice and the end user, what on earth is “Free Money” and where “o” where do you think the Employer has any concept of the Indiviguals policy, the basic problem from the “Top” is your still stuck in the old DB schems benifit concept and appliying it to the DC contract, you conned the Public into Auto enrollment by paying the large employers costs of implemntation by way of NI savings, pure obfuscation. What we have here is the Pension Industry lobbing those “At the time” given Goverment over us, who never last, setting up the gulable public, by “Free Money” contributing into non advised life long savings now being left to the Product Providers feeding frenzy. I would love the opportunity of an Public Domain discussion.
There’s no doubt that all employers who were “forced” in to setting up schemes which previously didn’t exist have on the hole found the process burdensome.
Industry jargon is a joke and the legislation surrounding AE has been subject to too many changes.
The biggest criticisms
1)Opting out should never have permitted.
2)Once contribution levels had reached a total of 8% pa they should have continued to rise as the minimum funding level is about 1/3rd of a typical DB scheme so without external assistance few will have a comfortable retirement.
3)If Employers or employees won’t engage with advisers the digitised options/decision trees are too complex for those that struggle with technology or industry terminology.
4)Never understood why cash was brought in at such an early stage within “default” (quite right-dreadful word) options as anyone knew that zero interest rates and rock bottom levels of inflation wouldn’t remain forever.
5)Imposition of stupid rules regarding annual/lifetime allowances,MPAA,age and salary restrictions,draconian penalties for minor and unintended breaches.
6)Should have just restricted tax relief to an affordable sustainable level.
Ros is quite right to bring this to the fore just as inflation and higher interest rates are taking off.
The industry hasn’t embraced AE and it will be future generations who suffer.
“future generations who suffer.”
AE would never have been necessary if the public had the common sense, the will and the means to voluntarily ensure that they contributed to saving. Whether that be to a pension or an ISA. Pensions only make good sense if there is an employer contribution and rules militate against salary sacrifice – which should in all logic be unfettered.
Is it really surprising that pensions are a mess when you have on the one hand politicians who are cosseted with their own pensions and are out of touch with ordinary people and on the other you have the bureaucrats – need I say more?
AE is the poor relation to decent pensions. Sure, it is probably better than nothing – but how much better? For many it will probably mean that they will be worse off as the impact on benefits will make them less worthwhile.
A question for Ros:
If the purpose of Auto-enrollment was to get the less well off to save additional funds to provide for an income in retirement, over and above state benifits threshold, other than the State Pension, Why do we alow those with Drawdown products not to have the fund classed as a Financail asset, what we have is millions of pounds being claimed from the goverment, such as universal cridit, housing benifit, council tax benfit and others, whilst Pension Funds are being allowed to sit hidden from the Benifit clainats assets.!!!