It has been much trumpeted in the national press but is there really a pension crisis?
Stammers: I believe there is and it is a crisis of confidence. Consumer trust in the pension system is at an all-time low and employer commitment to work-based provision has been greatly reduced by financial pressures and red tape. There is no single, easy, solution but incentivising employers to offer schemes and contribute to them, which, in turn, encourages employees to join, would be a significant step in halting the downward spiral.
McPhail: Yes, although it is probably truer to say that there is a personal finance crisis. Pensions are in crisis but equally there is a crisis with endowments, with short-term savings (average spare cash is something like £250), and with financial planning in general (20 per cent of people feel physically sick when they see a bank statement).
The problem is that pensions are like large, inert, slow moving things which are hard to turn around.
Ritchie: The pension crisis is real in the sense that, on current patterns of behaviour, most of today's workers will not maintain their standard of living in retirement. Until very recently, people seemed to think that they did not have to make much of a financial sacrifice in order to enjoy a long and comfortable retirement. I think the public is waking up fast. The question is what they then do about it?
Will the pension credit still be around in 10 years time?
Stammers: The means-testing threshold is linked to average earnings while the credit element is linked to average prices. This means the credit element will reduce in significance over time. On a wider level though, much depends on how successful the measures proposed in the Green Paper are in increasing consumer savings – particularly in the critical moderate-earner segment. Success here would make the pension credit less relevant. Failure, on the other hand, would make means' testing a fact of life for many more people – and against that back-drop the Government would find it very difficult not to offer some respite – whether that is the pension credit we see now or some “Mark II” version.
McPhail: I hope not.
Ritchie: I think there will always be means' testing in retirement because Govern-ments will always have an obligation towards the poorest of the elderly. Under the current rules of the pension credit, this will extend to more than half the retired population, and for those people the means-test will offset 40p in the pound of discretionary saving. It is these aspects of pension credit which I think will have to change. Whether it is still called pension credit may depend on whether the Labour Party is still in power.
Can the Government do anything to stop the flight from final-salary schemes?
Stammers: Probably not – the largely unknown and open-ended financial commitment involved is simply proving too much for many employers. What the Government can do though is ensure that where an employer is able to continue that commitment, it is made more attractive to do so. Where a change is necessary, the Government should ensure that contribution levels are not reduced – the adequacy of contributions is at least as important as the type of pension being bought, if not more so.
McPhail: No, this is King Cnut territory. There are too many external forces acting on final-salary schemes for the Government to be able to hold back the tide.
Ritchie: One thing that the Government can do is increase the value of contracting-out rebates, which, at the moment, is one more straw on the camel's back. Most defined-benefit schemes are contracted out and to cease contracting out means a complete review of the benefit structure, which invites a move to money purchase, even for existing members.
Having said this, I think that many final-salary scheme employers are stunned by the scale of the risk they now realise they have been taking and will find ways of reducing that risk.
Will the pension be considered to be the premier retirement income savings product in the future?
Stammers: Yes, provided nothing is introduced to alter the current balance with other savings products. If we are to expect the public to lock away savings to retirement, we must make it worth their while. This means safeguarding the incentives found in the current, and proposed, pensions tax regimes.
If the balance shifted away from pensions to more liquid products such as Isas and Oeics, far less savings would find their way through to retirement. That would be detrimental for consumer and Government alike.
McPhail: Under present Inland Revenue rules, pensions are the most tax-efficient form of long-term savings. I think that is unlikely to change over the next few years. If not pensions, it is hard to see what else would attract the volume of savings which currently flow into pensions.
Ritchie: Yes, because the pension is the only vehicle which is purpose-built for the job. People will realise soon enough that Isas and buy to let have their drawbacks, and that the tax position of pensions is superior, especially for employer contributions. The increased flexibility for taking benefits which is being proposed in the Green Paper will also help.
What could the Govern-ment and/or regulator do to make advising on pensions in the workplace more profitable for IFAs?
Stammers: More could be done to streamline the advice process in such situations, allowing a more focussed approach to fact-finding and establishing suitability. Allowing employers to adopt a more active role in promoting the scheme, without infringing the regulations, would also be a major help to IFAs. If employers were at the same time incentivised to contribute to the scheme, the job of persuading employees to join would be made far easier.
McPhail: The charging struc-ture of stakeholder pensions may be up for grabs again and a movement away from 1 per cent may emerge from the present Sandler products consultations. If we get more flexibility on charges, a simpler pension framework along the lines of the Green Paper published in December and a lighter regulatory touch through the new Sandler products, then we could not reas- onably ask for much more.
Ritchie: Advising on joining an employer-sponsored pension scheme is a much narrower advice process than carrying out a full fact-find. While some IFAs utilise focused fact-finds, others remain concerned over such approaches. I would like to see the discussions around lighter-touch sales regulation extended to the worksite context, particularly where the employer is contributing.
Will Government initiatives such as statutory money-purchase illustrations, improved telephone and website pensions information services, digital TV information and an online pension calculator increase saving among those currently without pensions?
Stammers: All these measures are of help but are not the complete answer. There is a big difference between information-giving and education – if there was not, we would not need teachers – children could just stay at home to read their school books.
The real key is to educate people on the need to save and we know from research the most effective way to deliver this is face to face. This emerged strongly in the Sandler recommendations and will hopefully be followed through in the FSA's consultation paper on consumer education scheduled for this summer.
McPhail: Not as much as the activities of IFAs will.
Ritchie: I hope so but, at the very least, people will not be able to plead ignorance if, in the future, they arrive at retirement and realise their standard of living is going to fall. They will have no moral or legal right to demand that subsequent generations of workers bail them out through higher taxes. Hopefully, that will lead to appropriate action while there is still time.
Tom McPhail, Pensions research manager, Hargreaves Lansdown
Stewart Ritchie, Pensions development director,Scottish Equitable