The Government’s announcements on capping pension charges and improving disclosure might intend to improve outcomes for members but they miss the bigger picture.
The crux of the issue will remain unresolved – we cannot accept an apathetic, disengaged majority, comfortable with auto-enrolment and vanilla pension schemes that will simply fail to see them through their later years.
On the face of it, improving disclosure and limiting the levels of charges look like a noble attempt to help people save money for their futures. With a raft of charging ambiguities dogging the sector, it is right to act now ahead of the looming auto-enrolment tsunami facing smaller businesses. There is no escaping the fact that the 30,000 companies with staging dates in the four months after April 2014 add a serious sense of urgency to overcoming the complexities and capacity issues that clearly exist within the sector.
However, what these announcements do is add to the huge pressure an under-resourced industry is already facing. Imposing a cap and forcing advisers and providers to rewrite existing pensions will be costly, leading to an estimated £1bn increase in provisions for pension providers and a complete lack of incentives among the adviser community. The knock-on effect will be a mass exodus of advisers from the SME end of the market in particular. Employees will have limited access to advice while employers will have to take a greater responsibility for engaging their employees around pension planning.
This exodus will create a two-tier pension Britain; those employers who can afford to pay fees for both added value advice and engagement costs and those who cannot, resulting in lower member contributions, lower pension outcomes and the removal of free access to an independent adviser for employees.
What is more, the very value of capping the fees charged by pension providers at between 0.75 per cent and 1 per cent is questionable. The reality is the annual management charge of many pensions is in fact lower than 0.75 per cent already – bringing a danger that costs could be increased to the capped level.
Similarly, while it is absolutely right to advocate increased transparency and pursue greater value for money, the report itself acknowledges that transparency alone will not drive behavioural change, that is, the ongoing and active engagement between people and their pensions. Simply providing more information will not encourage people to take notice and act.
And so the key to sustained, effective change will be relent-less pensions education and encouragement for both the employees and the employers. Recent LSE research found a clear and recurring strategy of communication and open dialogue significantly increases an employee’s engagement level with their workplace pension and improves personal contribution levels above 4 per cent.
Now is the time to act to capitalise on the emphasis on pension planning and ensure communication channels stay open for ongoing reform.
Michael Whitfield is chief executive of Thomsons Online Benefits