In the face of unprecedented change, the pensions and savings industry has fared well. Auto-enrolment is performing the job it was supposed to do with only 10 per cent of eligible workers opting out of a scheme so far. The pension freedoms have opened up options for those looking to maximise their retirement income and the maturing master trust industry is helping to improve engagement and transparency levels among members.
Yet, despite these successes, there is still an elephant in the room. People just are not saving enough. Research by Deloitte found that by 2050 the pensions deficit could rise to £350bn – the equivalent of approximately £8,000 per person per year, while the Money Advice Service estimates that four in ten adults in the UK have less than £500 in saving. With the futures of millions of Brits (and their families) at stake, action desperately needs to be taken to reverse this.
The measures the Government has introduced are admirable and genuinely a step in the right direction in getting people to save harder. Behavioural economists and policy experts have applied the nudge technique to auto-enrolment, in an apparent admission of the basic inertia of the populace when it comes to talking about pensions. While this has helped reduce the deficit, it has also had the unfortunate by-product of lulling people into a false sense of security.
Sadly, putting just 2 per cent of your salary into a scheme – even with employers’ contributions – is not enough to guarantee a comfortable retirement. Now:Pensions suggested recently that up to a quarter may opt out of auto-enrolment once the contribution figure hits 8 per cent, which hardly makes comfortable reading. If this happens, the very future of auto-enrolment could be in the balance.
This highlights a worrying cultural truth. British people are no longer interested in saving. There is a culture of gratification – the availability of cheap debt has made it easier for people to borrow cheaply, while perversely, low interest rates have discouraged people from saving. With people less willing to put off large purchases, the days of the man from the Pru have gone.
Unfortunately, you cannot change habits which are as ingrained as this overnight – attitudes take time to recalibrate. But where pensions are concerned, we do not have the luxury of time.
The industry has worked hard to engage with “ordinary” consumers and to improve understanding of and interest in pensions and the tax incentives and advantages that come with them. However, despite their prominence in the media, pensions still do not feature anywhere near the top of many people’s financial priorities. The strategy has not worked.
A radical approach is needed. We need to make saving compulsory.
This may be controversial and will be difficult for those whose incomes are already stretched by the everyday costs of living. But this would actually be a kindness – and help to cushion the financial blow in retirement for many people. When we are obligated to pay for something, we tend to find the money to do so, even if it means going without something today. We need to inject the same urgency into our saving habits as we do into paying our mortgages, bills and taxes.
The softly softly approach is not going to work when it comes to closing the savings gap. There will be a segment of the population on lower incomes, who may not have the means of doing this, but if we can start mandating it for those on median incomes, it would be a real step in the right direction.
We need to rip up the rulebook and make saving compulsory.
John Cowan is executive chairman at Sesame Bankhall Group