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Pension planning

The myth that the British are a nation of savers has been firmly laid to rest in a survey which shows that the culture of spend, spend, spend seems to be here to stay.

A recent report suggests the “combined pension statement”, which was designed by the Department for Work and Pensions and private providers to set out what more than 15 million people are due to receive at retirement age from both the state and their own private pension, may have little effect in encouraging a culture of saving.

In trials which were launched in the autumn of 2000, it seems more than 90 per cent of people have failed to act on the statements which, as expected, overwhelmingly show people continue to fail to save enough, with only just under 10 per cent looking to increase their contributions.

For the companies that have taken part in the initiative from both the defined-benefit and defined-contribution perspective – from Sainsbury&#39s to Axa Sun Life – there appears to be little difference in the response and the levels of enthusiasm to save. This effect is the one which is perhaps the most alarming.

While we might expect the incentive to save within private pensions to be, and to remain, purely a matter of personal ambition, the fact that within company schemes there is a stubborn reluctance to save more and make greater contributions points towards more fundamental issues.

We know many of the reasons why the current climate is not good for pensions. The impact of FRS17 and, many have argued, the removal of ACT credit have been calamitous for many company schemes. The wide impact of the compulsory purchase of annuities continues to be a disincentive towards encouraging greater provision through increased contribution levels.

But fundamental rethinking needs to take place to encourage people to save. There are signs that feeding into the Sandler review of long-term savings and investments and the Pickering review of private pensions will be some useful research-led information.

There are also some important new projects on the way which, hopefully, policymakers will take notice of.

One of the most influential is a new centre being launched by the Institute for Fiscal Studies, which is creating a centre for the Economics of Ageing. As part of a fundamental re-assessment of the motivations for saving, the IFS will be looking at a whole variety of micro factors which may influence the savings and investment decisions of individuals.

Wider than looking at existing provision, which can only give us a snapshot of the impact of current tax incentives, the studies will look at a number of factors, including epidemiological information.

This assessment will start to address wider sociological reasons around saving which have been buried for generations while the state pension was adequate and funded company pensions were offered to the many, not the few.

The epidemiological input may challenge some of the current actuarial assumptions around the design and shape of pensions. This may offer the ability to create new plans – either personal or workplace-driven – which offer better value and terms and sufficient lifetime flexibility to make the whole process of saving for retirement more attractive.

The Government seems to believe that the most eff-ective way of distributing pensions is through the workplace.

It has shown this through the creation of stakeholder but this itself remains a poor benchmark as both employees and employers have not received proper incentives.

If this really is the case, and I think it is, then much more needs to be done not just with investors/consumers but also with companies themselves to work out intentions and ambitions.

In the main, Government consultations on financial services issues focus on both the consumer and industry inputs, this has perhaps always been the case. It is all very well but there appears to be very little in the way of communication with the wider “supply-side” – the employer community which at the moment appears to be abandoning the traditional model for workplace pensions, defined-benefit schemes.

There is perhaps a considerable role here for the Sandler and Pickering consultations to talk more extensively to the CBI and Institute of Directors, as well as a number of the companies with significant existing defined-benefit schemes. Who is asking them just what could induce companies to make pensions more attractive?

One of the key phrases of the first Blair term, was that of “joined-up thinking”. We have not heard much of this in recent times but actions do speak louder than words and DWP Secretary Alistair Darling&#39s linking the Sandler and Pickering processes is to be applauded.

The outcome is also much anticipated because some firm policy proposals need to be implemented in the coming year to encourage retirement savings.

If not, then the current rash of defined-benefit closures will become a flood and the current private sector pension options do not look attractive to a vast number of people – especially to those aged 45 and under.

Everyone knows now is the time to take action – 2002 is turning out to be make or break for pensions.

Iain Anderson is a director and chief corporate counsel at Cicero Consulting


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