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Nic Cicutti: Why aren't pensions a priority?

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One of the things I have learned in the past two decades as a personal finance writer is that very few people really care about the one thing that ought to matter most - pensions.

If you ask someone if they are worried about their potential lack of retirement income, they will agree with you and the white-hot anger when the Government announced that pensioners would receive a pension increase of just 75p a week was something to behold.

But by and large, the majority of punters get more angry about their washing machine breaking down just outside the warranty period than they do about the possibility of living in penury for several decades after they finally stop work.

Indeed, just to return for a second to the 75p a week “mistake” by the last Labour Government, at least that is what Gordon Brown admitted it was several years afterwards, the angriest people by far were the pensioners themselves.

Deep down, the rest of us felt a sort of resigned disgust, a sense that this was, after all, no more than we might expect of a Government with a track record for saying one thing and doing another.

Whenever I hear people talk about pensions, I generally get a sense of fatalism, as if nothing they do will ever generate the kind of money they might need in retirement - and if they ever do bother to save, someone will come along and take that money off them anyhow.

In recent months, two things have further confirmed that view and that feeling of passivity. First was the announcement by the Government last year that pensions and benefit payments will be uprated in line with the consumer price index rather than the retail price index.

This means much smaller pensions for millions of workers when they retire. Saga director general Ros Altmann said: “The Office for Budget Responsibility forecasts that RPI will be around 1.5 per cent higher than CPI each year. It is a big cost saving for the Government.”

Yet the response to this sleight of hand by George Osborne was muted. A few hundred words in most newspapers about the trade unions’ failed legal challenge in the High Court last week and that’s it.

Then there was the announcement in the autumn statement last week that the Government is to delay auto-enrolment.

This was portrayed as an attempt to avoid imposing punishing extra costs on small businesses - effectively, an admission by the Government that it knows we are still likely to be in the economic mire three years from now.

But as the Telegraph’s Ian Cowie pointed out, the delay will affect millions of young people, for whom the effect of compounding means a 12-month deferral will lead to a much reduced pension in retirement. He gives the example of a 22-year-old earning £25,000 a year, where the one-year delay will cut his fund value at 67 by £43,000. Even a 50-year-old will see the value of his fund cut by 10 per cent.

Finally, there is the response to the Government’s decision to massively cut pensions for state and local government employees. The argument here seems to be this is a vitally necessary move. Why should public sector workers get decent pensions when those in the private sector don’t and why should taxpayers have to fund these unaffordable gold-plated pensions anyway?

In other words, having decimated the pension entitlements of private employees and given themselves vast pay increases over the past decade, our Government and employers tell us it is now essential for the public sector to join the race to the bottom. Never mind that several public sector pension schemes have built-in agreements that any extra costs in coming years will be met by increased employee contributions.

I should declare an interest. I worked for many years as a nurse and still know many health and public sector workers. This Government is, in effect, telling this group of people, many of whom perform vital services for the community, that they will have to work several years longer, pay £60 more a month - for a typical band five nurse taking home £1,400 a month - and receive a far smaller pension when they retire.

And, like performing seals, the near universal view among commentators is to applaud the Government. Never mind that MPs who make these decisions have some of the most generous pensions in the UK or that if people find that their occupational scheme entitlements are removed they will simply stop paying and leave taxpayers to pick up the tab 15 or 20 years down the line.

The issue of pensions has never been one of simple affordability but of priorities. Sadly, it is not a priority for anyone - the state, or the rest of us. Some time soon, I fear a dreadful reckoning.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Readers' comments (6)

  • Apart from the issue of affordability, one of the main reasons that people in the private sector have lost so much confidence in making and maintaining over the long term a commitment to a retirement savings plan is 25 years of government meddling and moving the goalposts, not to mention steadfastly ignoring all calls for scrapping the shackle of annuity rates. Consider:-

    1. Dividend income is now taxed, which damages growth.

    2. Intermediaries aren't interested in selling stakeholder pensions because there's no money in them and clients won't pay a fee.

    3. Thanks to Jeff Rooker, Contributions Insurance and Life Cover have been taken away ~ why? How can anyone have possibly thought that would be a good move?

    4. The tax charge/s on unspent funds are a punitive 55% with the remaining 45% potentially vulnerable to IHT.

    5. Annuity rates are now less than half what they were 25 years ago and the range of retirement income options is frighteningly complicated. Remove the annuity trap.

    6. The LTA (now reduced instead of being raised) and maximum input cap (also reduced), whilst affecting only relatively few people, are yet more negatives that stick in the public consciousness.

    7. 25 years ago, the basic rate of income tax, and thus relief on contributions, were higher than they are now. Why doesn't the government unify the rate of tax relief ~ for those in the private sector anyway ~ at a straight 30% for all?

    If it's genuinely concerned about the need to encourage people to save into a pension plan, why doesn't the government tackle these issues, all of which are relatively simple?

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  • For far too long regulators and commentators have focussed on cost rather than value. There is value in having a pension and therefore value in having someone tell you it is a good idea and chasing you professionally until you do one. There is value in keeping it monitored.

    For the vast majority of people paying regularly by dd is the way to go. But as an adviser I can no longer extract value for my time and expertise as commission has already all but gone. So we come back to the fact that middle England is largely unwilling to pay a fee for advise on regular savings.

    Here's the thing. Reasonable commisson was available from a 1.5% AMC contract with no exit charge and clients could have their advice priced into the product.

    Then along came the myopic FSA who messed it all up based on the concept that all commission is bad.

    WRONG!

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  • I'm sorry to disappoint Julian & Simon, but middle England WILL and DO pay fees for financial advice.

    As Simon says people need to value something to want it or pay for it.

    If they (not you!) value a pension they will pay you. After all they've paid you before, it's just that it was hidden away as commission.

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  • Simon
    If you wish to advise on pensions, there is nothing to prevent you obtaining your clients agreement to have the cost of advice deducted from their contributions after 2012 as a fee directly applied by the provider and rebated to you. Some providers have latched on to this early, but you may have to simply explain this to clients in more understandable terms or just charge a set fee up front.

    Percentage of premium fees are still permitted under the new regime, but they cannot be funded by providers they are paid as a deduction from the premium invested.

    In other words "front loaded" contracts will be the norm.

    What is in dispute is the amount of fee that is reasonable in the circumstances.

    E.G. £200 pm contribution (£2400 pa) current fund based trail commission of 0.5% pays £12 pa

    Assuming it takes 5 hrs work to plan under the full market principle and implement the pension plan at £125per hour, this will mean the plan has to be in force for 52 yrs for you to get back your costs.

    The alternative would be to tailor your advice proposition to include a simplified advice service alongside full financial planning and charge say for 2 hrs work on completion of implementation of plan (£250) with no trail and an annual service fee as required or just a set fee.

    Life is going to be difficult at first after 2012, but the main obstacle is a lack of consumer information from the FSA as to what it will mean for consumers.

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  • SOME of middle England is prepared to pay for certain types of advice BUT, when it comes to advice on which is the best bargain-basement product into which to make a long term retirement savings commitment, my experience has been that none will. This is never truer than with stakeholder pensions, to which people are attracted because they're cheap. Never mind that they're still governed by all the usual complicated pension rules and thus require the same level of advice as a non-stakeholder plan. Their overriding virtue is that they're cheap, so paying a fee would negate the very thing that has attracted the client to that class of product in the first place. How can it be any other way?

    For the past 8 years or so we have recommended only CAR products ~ no commission, a pre-sale report fee and no smoke or mirrors as to how the costs of our services will be met. Stakeholder pensions are simply not a viable proposition for the provision of advice. They never were and never could be.

    That aside, for all the reasons I've already set out, hardly anyone wants to go anywhere near a pension plan anyway.

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  • Gosh, some excellent comments to this article, but live in an ever-changing land; changes which will always have the 'fors and against' following, so I suppose it's true you can't keep everyone happy.

    Julian, I think your comments hit the nail on the head, but taking out the technicals it simply boils down to people's attitudes towards retirement planning. Most people live for today and tomorrow and dealing with something that’s 25-30 years off it not really a consideration.

    It is sad, when the writing is on the wall...plenty of doom and gloom and we (not us) still do nothing to change our destiny...insanity is thinking things will get better...for things to change we have to change. So first and foremost this is the biggest challenge that everyone has to face...if I am price lead then you have an upward battle...if I am open minded, I will listen to you and if I value your advice then I am happy to pay...

    We all know most people resist change and as the UK is in pretty bad shape tough decisions have to be made…BUT I agree there are too many chiefs. It’s not as if we’re not aware of this just watch Parliament for a few hours; do they ever agree on anything?

    I do see people paying more attention to their existing arrangements, so being able to think outside of the box is becoming easier. This in turn, means people are paying attention and therefore learning to plan and think ahead.

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