While I champion personal finance, I’m not so naïve to think that everybody who picks up their weekend newspaper dives straight for the money section.
Just as I throw the travel section straight in the recycling box, I would bet a fair few personal finance supplements are binned untouched.
Reading about money matters is not high on most people’s agenda, which is why there is a lack of awareness on pensions. However, the latest piece of research from the National Employment Savings Trust emphasises just how unaware people are.
Nest says people wonder why the value of their savings in a pension goes up and down. It also says many people have no idea that their money was invested at all.
“Many think their money is in some sort of bank account and are completely surprised it is invested at all. They don’t expect to see volatility,” a spokeswoman told me.
This is why Nest is, controversially, adopting very cautious strategies for its funds. It wants to prevent workers from opening their statements, seeing that the value of the fund has plunged by 10 per cent and then stopping contributing altogether. It’s investment strategy seems to be working. Nest automatically puts most savers into standard investment funds depending on the time they have until retirement. The growth phase is up 3.5 per cent, the foundation phase up 4.7 per cent and the consolidation phase up 5.5 per cent since their inception just over a year ago.
However, most DC schemes are not so cautiously invested and the past year’s performance is unlikely to show positive returns.
Millions of workers will have just received their annual pension statement from their employer. And, like the statement I just received, most will make for grim reading.
For all the money The Telegraph and I contributed into my defined contribution pension scheme last year, I didn’t get back what I put in – in fact, I ended the year £10 down.
Given what I do for a living, I wasn’t at all surprised. Yet I bet many workers were surprised and are wondering whether there is any point to pensions and consequently give up. The question is whether you would blame them.
Despite efforts to the contrary, education and communication to engage workers to take responsibility for their pension are a slow burn. This in turn puts the spotlight firmly on the quality of the default fund.
Yet the quality of default funds has often been questioned.
Not too long ago, the Cass Business School warned that unless the quality of default funds was improved, DC schemes put employees’ retirement prospects at risk. It found most traditional default funds did not match members’ needs in terms of asset allocation and risk profile. This is hardly surprising. Many default funds are still filled to the brim with equities and do little to protect members from the vagaries of stockmarket cycles and macroeconomic issues.
The recent economic turmoil has also highlighted another potential weakness of DC schemes – annuity rates. Most people will convert their pension pot into an annuity but rates are at record lows and show no sign of improving. Those retiring today are hundreds of pounds worse off than those who retired five years ago – even if the value of their pension was the same.
Financial experts warn consumers that giving up on pensions is a cardinal sin and tell them to hang in there as it is a long-term game. Besides, they say, you get tax relief and, if your company’s paying, it is as good as free money.
But DC schemes are far from a panacea for a comfortable retirement and I’m not sure the British public have a clue to their fallibility. If someone such as me who lives and breathes personal finance is concerned that a DC pension fund is not going to be enough, where will that leave those who think their money is being invested in a bank account? Angry and disappointed I’d imagine.
Paul Farrow is personal finance editor at the Telegraph Media Group