Lord John McFall is officially on tour. Fresh from a visit to Birmingham, via the offices of BP, the former MP for West Dunbartonshire is preparing to head north to his native Glasgow as he attempts to find answers to the most difficult question facing the industry how to get people engaged in saving for their retirement.
The NAPF-backed Workplace Retirement Income Commission, which the former Treasury select committee chairman is leading, is scouring the UK’s universities, businesses and organisations in a bid to inform the Government’s policy on the future of occupational pension provision.
The other members of the commission, which will deliver an interim report in the coming months before issuing its final recommendations in October, are:
AgustaWestland managing director Graham Cole, Usdaw general secretary John Hannett, RPMI chief executive Chris Hitchen, Institute for Fiscal Studies director Paul Johnson and Sainsbury’s HR director Imelda Walsh.
McFall acknowledges that the remit the commission has been given is “fairly broad and challenging” but nobody yet knows what reinvigorated pensions will look like and he relishes the opportunity to set out a “road map” for future pensions provision in the UK.
He says: “From a public policy point of view, it’s a huge agenda because at the moment a huge section of the population feel that they are not in a position to save. Answers are needed but I am not naïve enough to say we will be able to deliver a full blueprint. But I think it’s an opportunity for a road map to point the way forward.”
As he sits on the Lords terrace overlooking the Thames, McFall clutches part of the answer in his right hand a copy of the National Employment Savings Trust phrasebook (version 1.0), the Government-supported scheme’s well-received first attempt at simplifying the language that accompanies pensions.
He is fresh from a presentation at Nest’s London Bridge headquarters, where he was taken through the firm’s approach to delivering pensions to the masses.
He says: “The work Nest are doing is interesting, particularly around explaining pensions to people who haven’t been engaged before. But the problem is that 20 million people in occupational pension schemes are on a collision course for poverty in retirement and a significant chunk of those people are not going to be covered by Nest.”
One proposal that the former Labour MP appears keen to explore is limiting the use of the word pension to benefits provided by the state.
“The commission’s remit looks at the whole concept of pensions,” he says. “There is certainly a case for looking at whether the language has to change so that, for example, pension is whatthe state gives and retirement income is what you provide for yourself.
“It could be a more relevant term for people than pension, which tends to put people off saving today because there’s a notion that it’s something which you deal with later in your life.”
A key task for McFall and his commission will be to define the roles of Government, industry and the regulators in delivering a pension system that disengaged people want to engage with. Part of that focus will inevitably fall on young people.
’We have got to get across the concept that tomorrow is not like today’
I take him through a case study a 25-year-old friend of mine who has just decided to opt out of his generous defined-benefit scheme. Because he has been enrolled in the scheme for less than two years, the decision means he loses his employer contributions. Effectively, my friend who is using the money for consumption rather than to pay off debts decided £500 today is worth more than £1,700 of pension at retirement.
McFall shakes his head. “It is extremely difficult. We have got to get across the concept, particularly to young people, that tomorrow is not like today,” he says.
“We need to get people to understand the notion that if you start saving into a pension scheme when you’re 20 or 30 years old, as opposed to when you’re 40, there’s a hell of a difference in terms of what you can expect to get at the end of it.
“What we could end up with here, if we don’t do something now, is a stratified society, with the majority being denied the prosperity that the minority have because of decisions that weren’t taken early on.”
There are two clear strands to the WRIC chairman’s thinking in this area at the moment making pensions themselves and the language that engulfs them simpler and more relevant to younger savers and improving how the importance of saving is communicated.
In achieving both these aims, McFall stresses to the point of exhaustion the need to improve transparency in the way pensions products are sold to consumers.
He says: “The transparency problem is systemic. At the moment, pensions are not transparent. Improving transparency would be a huge step forward but it’s going to be very difficult to get that.
“I think it is for both prov-iders and the Government to sort out. It’s the Government’s job to look at the regulations that have been put in place since 1995 which is the equivalent of about one a week and see if there is anything that can be done to make it simpler.
“But it’s the job of the prov-iders to be treating customers fairly. From my time as chairman of the Treasury select committee, it was really the FSA that took the lead in treating customers fairly and they had to pull the industry along.
“I think the pension industry has to be a bit more on the front foot than it has been in the past.”
McFall will also look to address the “asymmetry of knowledge” that exists between providers and customers when pension products are sold as he looks to shift the balance of power back towards consumers.
He says: “People getting sold pensions do not really know or understand what it is they are buying but they are in it for a lifetime. We need to address that asymmetry of knowledge because it is an area that has bedevilled the industry in a number of areas.”
In last month’s Retirement Strategy, Tisa director of policy Malcolm Small called on the Government to set out its vision for the future pension architecture in the UK. The WRIC, which is supported in spirit (although not financially) by the DWP, will feed in to that process.
While McFall is at pains not to dismiss defined benefit provision, he is not about to swim against the tide of closure across the private sector.
He says: “I wouldn’t like to put the death rights on defined-benefit pensions but when you look at the flight from defined benefit to defined contribution, it looks as though it is only heading in one direction.
“It would be nice to have defined-benefit pensions but the reality is different now and we have got to be pragmatic. If we came forward and said companies should start providing defined-benefit pensions people would think we were living in ’never never’ land.”
McFall acknowledges that simplification of the state pension, with the potential introduction of a £140 flat-rate payment, gives the commission a platform on which it can put forward recommendations to policymakers. However, he believes reinvigorating occupational remains “the big policy issue” of the moment.
He says: “I have spoken to Steve Webb and he is said that reinvigorating workplace pensions is the aim. So while other elements, such as ref-orm of the state pension, are worthwhile, the big policy issue is the reinvigoration of occupational saving.
“This affects 20 million people, so when you are talking about that number of people, it has to have a resonance.”
McFall insists whatever proposals the commission eventually brings to the table the first stage of the call for evidence only closed on April 26 will be based on broad consensus. However, he concedes that, given the scope of conflicting interests within the pension industry, this will be far from simple.
He says: “It won’t be straightforward but we need to achieve consensus. Without consensus, we cannot do anything and I have never engaged in futile gestures. You could be locked away in a cupboard and produce the finest report and it will not affect anybody. What good is that?”
’You could be locked away in a cupboard and produce the finest report and it will not affect any-body. What good is that?’