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Powers of persuasion

One way to consider the Pickering report is to look at the list of recommendations it has made. The pension industry (and others) can then determine which of those recommendations it would like to see taken forward or it can try to work out which recommendations the Government will take forward.

But there is another way and that is to think of it in the context of all the other work that is currently being done on pensions in particular and savings in general. This is an important analysis to make because Pickering is, and always was, only part of a much bigger picture.

So we need to consider what the Pickering team was asked to do and, perhaps just as important, what it was not asked to do.

For example, one commentary said something to the effect that there were was very little in the report about tax.

If you stop and think about that for a minute, it is hardly surprising that there should be very little about tax in a report commissioned by the Department for Work and Pensions, particularly at a time when the Inland Revenue is working on its own review of pensions.

The brief was to cover DWP legislation on private sector pensions. So legislation on, for example, preservation of benefits, disclosure of information and the structure of contracting out, were part of the remit.

On the other hand, rules governing benefit and contribution limits, the design of annuities, or the nature of state benefits were not within the scope.

So we need to see this in the context of all the other reviews that are under way. The remit of the Sandler report was much wider but also made recommendations that would affect pensions. Indeed, where the Sandler recommendations would affect pensions, the two reports have much in common. Both reports recommend reducing the amount of paper given to customers. Both recommend simpler products. Both acknowledge the need for advice in the pension arena.

An important missing jigsaw piece is the Inland Revenue review. The impact of legislation from the DWP is only half the story as far as pensions is concerned.

Much of the complexity currently in the system results from the extremely complicated workings of the benefit and contribution limit system.

This is not an academic, technical point. Occupational pension schemes in this country, whether administered by employers in-house, by benefit consultants or by insured providers all have to run systems designed to ensure that maximum benefit limits are not breached. They all do this knowing full well that the vast majority of members never get anywhere near Inland Revenue maximum.

Sheer common sense tells us that, for most people, what limits the amount they pay into their pension is dictated by other calls on their income, not the amount that the Inland Revenue will allow them to pay.

The problem we face in UK pensions is not that millions of people are trying to dodge the taxman by abusing limits, it is that not enough people are building up pensions and that, of those who do, many are not building up enough.

It does not matter whether you agree the figure, the point is the general consensus that there is a savings gap and that it is a very big number. The challenge is to bridge that gap.

Clearly, if we are to do this, barriers to saving must be lowered. In essence, this is what Pickering and Sandler were about. This is also what an Inland Revenue review of contribution and benefit limits must be about.

If we can get rid of detailed legislation and guidance wherever it over complicates or is unnecessary, many barriers will be removed and it will be easier to save.

But people also need to be persuaded to save and encouraged to save. People queue at supermarket checkouts. They do not queue up in front of advisers&#39 offices, demanding to buy pensions.

No one should underestimate this point. The savings industry is the only industry I can think of that goes out to its customers with a marketing message which is essentially saying “consume later”. Every other industry, whether it is selling cars or consumer goods or anything else, is essentially saying to its customers “consume now”, which is a much easier message to sell.

The power of advice must be acknowledged and it must be accepted that advice has to be paid for. And for powerful arguments in this area, we need look no further than the second Oliver Wyman report, recently published by ABI, which quantifies the potential impact that raising the 1 per cent charge cap could have on the savings gap and makes it clear that a higher figure is needed.

Some would argue that there is actually a very simple solution to this part of the problem. It would not be necessary to persuade people or offer them incentives to take out private pensions if it were compulsory.

The problem with compulsion is that its simplicity is deceptive. Compel whom? To do what? How can you compel low earners who cannot afford to save? How would employers react? What level of compulsory contribution or pension would you set? What would be the impact on existing pension provision?

Anyone advocating compulsion would have to answer all of these questions.

They would also have to be able to prove that compulsion would, in fact, improve the overall savings ratio (which has not proved to be the case in, for example, Australia). And there is no getting away from the fact that compulsion would have significant political implications.

In the absence of compulsion, we need to come up with top-quality incentives to encourage individuals and employers. The Pension Green Paper promised for the autumn gives an opportunity to propose and debate a whole range of incentives. This opportunity must not be missed.

Incentives could include tax credits for employers, as recently suggested by ABI. Encouraging employers to contribute has the huge advantage that evidence shows employees are far more likely to contribute if their employer does. Should employer tax relief be related to a certain level of employer contribution and employee take-up rate?

On the individual side, would the Government consider some form of matching contributions up to a certain level of individual contribution? This sort of mechanism would be a very obvious and simple incentive to save.

Funded pensions in the UK have much to be proud of but equally we have a lot to do. So far, with Pickering and Sandler, we have made a start by identifying barriers that must be brought down. I hope that the Inland Revenue proposals when published will also suggest barriers that it is prepared to dismantle.

But we must not kid ourselves that removing barriers will do the trick. If that is all we do, it will not be enough. People need to be persuaded of the need to save and encouraged to save. Employers need to be encouraged to offer pensions to their employees and to contribute to those pensions. We need ladders to help people into pensions.


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