Malcolm Small’s recount of his time spent selling financial services products in the 1980s will doubtless strike a chord with IFAs attempting to plot a course through the UK’s fiendishly complex pension system.
In a former life, the Tax Incentivised Savings Association director of policy trawled the British motorways selling financial products door to door. And while the methods of delivering financial advice have inevitably altered beyond recognition, as have the pension products offered by IFAs, the fundamental problem remains – pensions are hard to sell.
Small says: “When I was selling financial products on the road direct to consumers, I kept a tally of my strike rate. Typically, I would do one and a half visits to sell one life insurance policy and two visits to sell one savings policy. But the strike rate for pensions was about nine to one because it is such a hard sell.”
The primary virtues of the pension as a long-term savings vehicle, at least to policymakers and those in the industry, seem glaringly obvious – matched employer contributions (“free money”, as pensions minister Steve Webb likes to say) and generous tax relief courtesy of HM Treasury.
Controversially, the man at the helm of policy at Tisa – an organisation whose business it is to know which tax incentives encourage saving – believes tax relief on pensions does not work.
He says: “This will be heresy but we do not think tax relief works. The bulk of the relief goes to people who can already afford to save and it clearly does not go to the people in middle England who we need to encourage to save.”
’Phrases came through like “legalised theft” and “rotten to the core”, so it is not a great starting point. The problem is if employers think pensions are rubbish, they are not exactly going to be jumping up and down encouraging employees to save’
Small says ministers and Government officials need to come to terms with the fact that, particularly for low to middle-income earners, the pension is an unattractive savings vehicle.
He says: “The problem remains that when we go to ministers and officials and tell them people are using an Isa to save for their retirement, the reaction is, ’they should not be doing that, they should be using a pension’.
“It needs to be understood that people are already using Isas to save for their retirement. Within Tisa, we think around 60 per cent of cash Isa money and 85 per cent of equity Isa money sticks for around 10 years or more, so people are already using Isas for long-term saving.”
Tisa, which is the trade body for wraps and platforms, childrens’ savings and Isa markets, is pushing policymakers to recognise the role Isas play in long-term saving by shaping the UK’s pensions architecture around the product.
Small says this could precipitate the demise of the word “pension” as people increasingly gravitate towards more flexible savings products.
“I suspect that this year, Isa saving will be bigger than all personal contributions into pensions,” he says. “It is a bit of a tipping point and I think that where customers have a choice, they are choosing not to have a pension.
“Policymakers need to take on board the message that we need to design a pension architecture that appeals to people in the 21st century rather than appealing to people in the middle of the 20th century. Peoples’ circumstances are very different now.”
It remains unclear how, if at all, policymakers will harness the popularity of the Isa to build an improved savings culture in the UK. Centre for Policy Studies research fellow Michael Johnson, for example, has pushed for greater harmonisation of the tax regimes governing Isas and pensions.
’Whatever redesigned pensions architecture we get, it is going to look a lot more like an Isa’
Standard Life recently joined the debate, suggesting that the Government could allow people to be automatically enrolled into both pensions and Isas in its response to the Treasury’s call for evidence on early access.
Small says: “Whatever we get by means of a redesigned pensions architecture, it is going to look a lot more like an Isa and it will probably feature contribution matching rather than tax relief as we understand it.”
It would be all too easy to suggest that Small is merely promoting the vested interests of the Isa industry, which Tisa represents. However, the sheer size of the market – there are currently around 18 million Isa accounts open in the UK – means his views deserve to be heard.
Furthermore, behavioural research conducted by Tisa indicates the Isa is the preferred savings vehicle for most people.
Small says: “We did some focus group research a couple of years ago. We put some boxes representing savings products on a table – we did not label them – and described how they worked. We had a pension, an Isa and a 401K and we asked, ’which of these vehicles would you most like to use for your retirement?’. “Nobody chose the pension, not a soul. We did this three times and each time the Isa was the most popular because it is simple, it is easy to engage with and understand. We have got 18 million Isa accounts open in the UK at the moment – this is the biggest savings success of the last 20 years.”
As part of its efforts to inform debate on the future of UK pensions, Tisa has inevitably turned its attention to auto-enrolment.
The organisation has canvassed the pensions attitudes of 1,200 small, medium and large employers ahead of the October 2012 start date for the reforms.
Small says the research, which he will take to the Department for Work and Pensions, The Pensions Regulator and Nest, produced a “pretty negative” response and provides a stark warning to both policymakers and regulators.
“Phrases came through like ’legalised theft’ and ’rotten to the core’, so it is not a great starting point,” he says. “The problem is if we are going to ask employers to engage employees in pension saving, if they think pensions are rubbish, they are not exactly going to be jumping up and down encouraging emp-loyees to save.”
Small says the research identified two very clear problems facing the Government’s flagship reforms – affordability and the fact that the main burden for contributions lies with the employee. On the second point, he looks to the example set by Australia, “the best pensioned country in the world”.
Once the UK pension reforms are fully rolled out in 2016, the employee will contribute 4 per cent of salary while the employer will be responsible for 3 per cent, with the remaining 1 per cent provided through tax relief. The worker will, of course, be free to opt out if they choose.
Australia instead chose to place the burden on the employer, introducing a compulsory employer contribution of 3 per cent in 1994. It has ratcheted up since then, with employer contributions expected to reach 12 per cent of salary next year.
Small says: “I am not necessarily saying that should happen here but when I have been out to talk to company boards and explained how auto-enrolment is going to work, the universal reaction is, ’oh for goodness sake, why didn’t they just make it compulsory and get on with it?’.”
Small also suggests the pension product itself is inherently unsuitable for the purposes of the Government’s reforms.
He says: “Matching contributions works best for low to moderate earners and they are the people we are trying to get to save.
“That is the target for auto-enrolment. We want that to be a success but we suspect there may be barriers in the way and one of those might be what we are asking people to save into.”
The findings of Tisa’s employer research suggest the Government is up against a potentially lethal cocktail of employers who do not like pensions and employees who cannot afford to contribute. Small says this could force policy officials to revise their expectations of employee engagement downwards.
He says: “I think success for the Government would be 80 per cent of the target audience saving for their futures in a pension. I suspect we might miss that policy objective.
“Based on my own experience of running contributory pensions, the opt-out rate will be nearer 40 per cent. I hope I am wrong.”
With a background in Law, heavy engineering and public administration, Small has specialised in all aspects of management in financial services at senior level for the last 20 years.
He has undertaken research in pensions hrough The Pensions Report and is founder of The-Pensions-Net-Work.
He consults in the UK and internationally with organisations interested in all aspects of long-term saving and retail financial services.
Small is director of policy at the Tax Incentivised Savings Association, leading the work of the association in pensions, distribution and platforms.
He is also a founding director of the Centre for Retirement Reform.
In addition, he is a senior policy adviser on pensions at the Institute of Directors and a member of the advisory council at The Pensions Regulator. He is also an associate fellow of the International Longevity Centre.