If you want to get heads nodding wisely at pension discussions all you have to mention is people’s lack of engagement. You should then praise the pensions dashboard because, as Aviva’s chief digital officer Andrew Brem said when it was launched last month, “it is a vital tool in increasing engagement”.
In fact, all that was wheeled out of Aviva’s Digital Garage (where else would you design a dashboard?) on 12 September was notes towards the first steps for a draft proposal. We will not see an actual prototype until March, more than two years since it was first proposed by the FCA in December 2014. Such is the glacial movement of the financial services industry when asked to help customers understand things.
Of course, I hope the pensions dashboard does help some people find lost pensions, check what they are worth and get some estimate of how much (or how little) they will be when they reach pension age. Such an online tool is not something anyone can be against. But will it really help most people? No. Because we do not engage.
That is why 70 per cent of us still pay the highest tariff for our energy even though a record three million (about one in nine) changed electricity supplier in the first eight months of this year. Professor Catherine Waddams told BBC Radio 4’s Money Box recently that when those one-year deals end only half switch again. The rest are automatically moved to the standard variable tariff, always one of the most expensive on offer.
We do not want to engage. We want a simple world where products are honest and straightforward and do not need a spreadsheet to choose the best.
Bank of England chief economist Andy Haldane got some stick recently for saying he did not understand pensions. But he does not have to. At the age of 49 he has already earned a pension worth £83,816 a year from 2027 when he reaches the age of 60. And it will grow by 1/50th of his £182,088 pay each year until then – or until the lifetime allowance is reached. He knows the pension is safe. The Bank is putting 54.6 per cent of employees’ pay into it.
Why should we engage? Haldane does not have to understand his pension because it is a classic – albeit generous – final salary scheme of the sort that was normal for almost all pension schemes before 1988. He does not have to engage. That is the beauty of final salary schemes. You pay in a small amount (in fact in Haldane’s case nothing) and at scheme pension age you get a known benefit, linked to your pay, at least part of which is index-linked for life. Guaranteed.
Of course, funding problems mean that any of the 6,000 existing schemes may end up in the Pension Protection Fund – as 225,534 members of 853 schemes already have. That pays a nominal 90 per cent of the promised pension (100 per cent if they were already drawing it at full scheme age) subject to a cap – £33,678 at age 65. CPI inflation protection is paid for pensions accrued from April 1997. Again, no engagement is needed. The rules are laid down.
According to JLT Employee Benefits, only 11 of the FTSE 250 companies and 24 of the FTSE 100 are paying significant amounts into active defined benefit schemes. At a recent pension conference, the talk was all of running down, arranging buyouts or winding up pension schemes. It was all very depressing.
The only alternative considered was a defined contribution scheme. We know the problems there: no certainty, charges which even at modest levels can cut the growth in half over the 40 years of a pension, and compulsory engagement. The Chartered Institute of Management Accountants found last year that three in four school leavers struggled with literacy and maths. Many – perhaps most – people with degrees do not understand pensions. Only a small minority will ever engage in any meaningful sense.
“Of course, I hope the pensions dashboard does help some people find lost pensions, check what they are worth and get some estimate of how much (or how little) they will be when they reach pension age. Such an online tool is not something anyone can be against. But will it really help most people? No. Because we do not engage.”
The way forward
What we need is a new sort of DB pension scheme; one that makes affordable promises. With no engagement. Consider the following changes:
- Investment strategy: Concentrated on keeping charges down rather than trying to beat the market. No one ever does in the long-term and when they do it cannot be predicted in advance.
- Indexation: RPI is no longer a national statistic. CPI is and comes with a built in cut. The maths it uses makes it about one percentage point less than RPI. Over 20 years that saves around 11 per cent of pension costs. Use CPI and then go Dutch – only use that if there is a surplus.
- Longevity: No one can stop ever-lengthening lives but scheme pension age can be aligned with state pension age. And schemes can go further by linking it to growing longevity, as the Government plans to do for state pension age but so far has lacked the courage.
- Structure: In final salary schemes high flyers get more pension per pound contributed, more tax subsidy and draw it for longer than low paid colleagues. Career average schemes are fairer, more affordable and less open to abuse.
These changes would keep costs and risk down, so employers can put more in. When pensions move from DB to DC contributions are typically slashed in half: 21 per cent total for DB versus 9 per cent total for DC in 2013. Auto-enrolment slashed them in half again in 2014 to 4.7 per cent. It also shifts the balance so employees pay more than employers. Reverse that and pay in 21 per cent, split at least 14:7 to employers.
Simple. But not, of course, easy. Better though than leaving people with a DC pension when the only guarantee for the great majority is that it will not be enough to live on in retirement.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney