Pensions are a bit like grapes; it is far more efficient to distribute them in bunches. No one in their right mind would think it at all sensible if supermarkets sold grapes individually, with every single one barcoded. And yet, in the mid-1980s, we thought it was sensible to distribute pensions to half the
UK’s employees one at a time, rather than in groupings around their place of work.
It seems crazy now – completely inefficient and enormously expensive – but we had embarked on a quest to sell personal pensions to millions of workers.
At the time, very few questioned what was going on. It was all the rage to talk about individual choice and the whole thing was fuelled by the breaking down of the state second pension into individual personal pension accounts. It changed the nature of pension provision in a profound way, but not for the better.
It took nearly 30 years for us to come to our collective senses and recognise once more the importance of the workplace pension, and the efficiencies and better value for money that can be achieved by distributing pensions in bunches. Indeed, automatic enrolment was a long time coming.
But the price we have had to pay for the introduction of auto-enrolment has been the demise of the state second pension scheme.
That is unfortunate, as we would have been much better off to have had compulsory workplace pensions for all with a strong two-tier state pension as well.
It would have provided a second string of earnings-related pension, which would have allayed the concern I hold that many people’s auto-enrolled savings will do nothing other than replace the loss of the future accrual of that state second pension.
Time will tell how that works out, but the clear danger is that millions of people will not have sufficient long-term savings unless the compulsory contribution levels are increased substantially.
It is not just pensions and grapes that are better sold in bunches. Now that every UK workplace is required to provide a collective pension scheme, it is possible for many other financial products to be efficiently distributed that way too.
Group life assurance is clearly better value than individual life policies; the same with other insurance-based products. I would hope that the first wave of auto-enrolment will be closely followed by a widening out of the benefits that will become readily available through the workplace.
There is a trend already for collective arrangements that have only been available to large workforces to become available to employees of smaller firms.
This is an important development that not only recognises the pivotal role employers can play in facilitating the financial wellbeing of their staff, but crucially recognises the fact the vast majority of workplaces in the UK today employ fewer than 10 people.
Our 21st century workplace pension and benefit world is beginning to take shape at last, as the second decade of the century comes to a close. Let’s hope it turns out to be a lasting shift in both practice and attitude.
Steve Bee is director at Jargonfree Benefits