It has become fashionable to say that only way to close the £27bn savings gap is to compel people to save. But the “compulsion” argument misses the point. The real issue is where that gap is widest.
Of course, it is of great concern that there is a huge gap between what people need to save and what they actually save to provide for a comfortable retirement. But even with compulsion, the only solution is through universal participation that makes saving as ingrained in the British culture as afternoon tea.
Some segments of the population are already sophisticated savers. Remember that Wealthy Britain embraced stakeholder pensions, buying them for tiny tots and non-working wives from day one. It is a different story among the wider population, many who are low-earners or unwaged, and it is here that the savings gap is acutely worrying. It is principally because of concern over this group that we have the myriad regulatory reviews now under way.
Put simply, there are no mechanisms that can compel the country's less affluent to save without exchanging the risk of poverty in retirement for actual hardship now.
There are some big obstacles that could easily be eradicated. For starters, people should have one, portable pension pot that they take with them throughout their life whether they change jobs or become self-employed.
Next, we should scrap the state retirement age. It no longer reflects the population's ability and inclination to work beyond 65. Instead, we could have a more flexible requirement for individuals to work for a given number of years and then choose to retire at whatever age they wanted.
Then there is reform of our complex benefits' system. It involves means-testing, which is unpopular, costly to run and acts as a disincentive to saving. Moreover, in its rush to make savers of us all, the Government risks making society's most needy waste money by contributing to a pension that will provide an income equivalent to that available through the benefits' system.
It is easy to see how the system could become more user-friendly. The basic state pension could be raised to the level of the minimum income guarantee, making the pension credit redundant. Serps and the state second pension could be phased out, confining the confusing concept of contracting to the rubbish bin.
The regulatory system also needs simplification. This burdensome regime has hindered take-up of stakeholder. A lighter regulatory touch could easily be applied to these simple products without any threat to consumers. For example, the qualifications for those delivering worksite presentations could be reduced to the same level as for non-regulated pensions. This would ease the process of choosing a stakeholder, with revamped decision trees being used by second tier advisers.
Such reforms depend on overhaul of the benefits' system – particularly contracting-out advice – which arguably deters advisers from selling stakeholders to low-earners for fear of misselling charges.
Finally, there have been plenty of calls for the rule compelling the purchase of an annuity at 75 to be scrapped. Of course, alternatives to annuities would allow greater freedom for those retiring with very large funds, without reducing the Treasury's tax take. But it would make more sense to improve the situation for the majority of the population before turning to the wealthier. We need sensible ways of helping people understand annuities and get the right products at a good rate.
It is time for the debate to move away from compulsion and on to creating a savings culture where the savings gap is widest.
Tom Fraser Managing director,
AMP UK Financial