Matthew Rankine discusses the benefits of encouraging people to save more
Like an overlooked aunt who receives a limp bouquet of garage-bought flowers once a year at Christmas, the pensions industry can feel ignored by politicians much of the time.
Except, that is, when the government needs to surreptitiously raise some extra tax revenue. Then politicians treat the pensions sector more like a cookie jar, chipping away its tax breaks confident in the knowledge that few voters will notice, and fewer still will understand, what’s happening.
At election time this logic is briefly turned on its head. Pensions – or rather pensioners – suddenly become very important to politicians of all stripes because retired people are the most likely to vote.
The main parties are split on whether to keep the state pension triple lock. But whoever wins the election, one thing is clear: the new government will be unable to resist clawing back something from pensions, either by reducing the state pension or by cutting the tax relief offered on private pensions.
No-one likes a whinger
When – not if – this happens, the great and the good of the pensions industry will queue up to collectively gnash their teeth in the pages of Money Marketing.
But ladies and gentlemen, some perspective please. Longer life expectancy and an ageing population are irresistible demographic forces that no amount of wailing will reverse. Sooner or later, the government will be forced to pare back its pension tax break largesse.
This is likely to hurt the pensions sector. But rather than whining, I suggest we take it on the chin and strike a devil’s bargain with the government.
In return for accepting a degree of HMRC stick, we could secure a very powerful carrot – by getting the government to use its “nudge” resources to persuade more people to ramp up their private pension saving.
Mind control for good
If you’ve not come across them before, nudge tactics are a form of behavioural psychology that has become popular among governments on both sides of the Atlantic. President Obama was a big fan, and in 2010 Britain’s coalition government set up a Behavioural Insights Team, or “nudge unit” as it quickly became known.
Auto-enrolment is a good example of the thinking in practice. By using an “opt out” rather than “opt in” model it makes a virtue of people’s inertia. When most people will choose the easy option – i.e doing nothing – it makes sense to make this the beneficial one.
The technique is not without its critics – for whom its ability to suggest choices smacks of mind control – but it has been used successfully to persuade people to eat healthier food and drop less litter.
When most people will choose the easy option – i.e doing nothing – it makes sense to make this the beneficial one.
Auto-enrolment has provided a great first step towards getting more people into the pensions habit. But the tiny amounts that many people are contributing won’t be enough to solve Britain’s pensions crisis.
So why not nudge savers to make more of their auto-enrolment pensions? At present the minimum employee contribution is just 1% of salary, and while this will rise to 5% by April 2019, for many workers this won’t be enough to produce a retirement income even close to their employed earnings.
The nudge technique could be brought to bear by means of a pay rise contribution escalator. In other words, each time an employee gets a pay rise, both they and their employer would need to increase their pension contributions by a fraction of a percentage point.
The employee wouldn’t feel like they were losing out, as even though their level of pension contributions would rise, they’d still be better off each month thanks to the pay rise. And by making the measure an “opt out” rather than an “opt in”, the chances are most people would accept it in the same way they accepted auto-enrolment – because it’s the easy option.
It’s a simple idea that could apply some gentle but decisive pressure – by reminding people that trading some of the instant gratification of a pay rise for a decent retirement isn’t such a bad idea.
Benefits for both sides
The pensions industry has little love for politicians’ short-termism and constant meddling in the sector, but this would be one intervention that could benefit both.
By encouraging more people to save more into their personal pension, the government wouldn’t just boost the pensions industry, it would also mitigate its own longer-term liabilities as life expectancy – and the state pension bill – rise steadily.
So a fair quid pro quo would be to demand that the price of any tax raid on the pensions sector be a government pledge to use nudge psychology to encourage more people to save more, and take more interest, in their personal pensions.
Both the pensions industry and the government have an interest in working together to get more people doing the one thing that will make the single biggest contribution to their future financial security – saving into a personal pension.
Matthew Rankine is director at Liberty Sipp