The spectre of means-testing still threatens to throw into question whether some should save at all. The Government has been assessing the true extent of who will be affected by means-testing once the full pension reform agenda is bedded in, including state pension changes. It was due to publish its findings by the end of the year but this could be put back to early 2009.
Leaving aside the issue of whether it is worthwhile to save, people will still have a number of questions surrounding auto-enrolment. The Department for Work and Pensions commissioned some research recently to look at the information that people believe they will need to decide whether to stay in or opt out. It concluded that there are core information requirements essential to making an informed decision and supplementary information requirements which will increase people’s confidence in their decisions.
Seven core information requirements were identified, the two most important being affordability and security. The main questions people had were how much they would have to pay in contributions, whether they were tied into a commitment or whether they could stop or take a break when they wanted. This information will be needed up-front with the basic information about auto-enrolment and the ability to opt out. It should probably given in terms of pounds and pence, rather than percentages, allowing people to judge whether they can afford it.
The other main issue was security of the pension pot, in particular how safe it was, what the financial risks were and the likely effect of changes of Government on the continuance of the initiative.
The other core requirements were the financial advantages of pensions over other types of savings, how much people could expect from the state pension and workplace pensions, what would happen on death, if they could transfer their pots between employers and the impact on job security and employee benefits.
The supplementary information identified was wide-ranging, from whether savers could access the money before retirement through to whether there would be loyalty rewards for long-term saving and how employers would be encouraged to comply.
What is interesting is that the research highlights that even if people have the right information, the decision may depend on other things. This is partly because people will judge the information against their already formed ideas about saving, pensions and financial services in general.
Even if they have no real pre-conceived views of saving, some would rather not make an instant decision and would instead discuss it with friends and family. Some would seek out regulated advice through a financial adviser.
I believe this research will be useful to the DWP when setting the information requirements for the auto-enrolment process. People will seek advice from a number of different places. We have to make sure that everyone instinctively understands that it is in their interests to save for their retirement, as they understand they should eat five fruit and veg a day to stay healthy. Otherwise we will be unable to harness the power of auto-enrolment and the opportunity that pension reform offers us.
Rachel Vahey is head of pensions development at Aegon Scottish Equitable