Searching for positive news in Scottish Widows’ ninth annual pensions report is like trying to find a needle in a haystack. The list of negatives seems endless, with increased longevity, the financial crisis, lower levels of provision, poor returns on equities and gilts and potential savers putting other priorities such as student debt and house purchase for a deposit before pension saving all piling on the misery.
Yet despite all these indicators pointing in the direction of leaner retirements, the report shows people expect to be better off in retirement than they did a year ago, with the average British worker anticipating stopping work at 66 and receiving an income of £25,000 a year. That, says the report, will require savings of £1,000 a month from age 30, a level of thrift that will be beyond all but a wealthy few.
Does all this mean people will think it is not worth saving?
Scottish Widows head of pension market development Ian Naismith says: “There is a danger people can be frightened off by the magnitude of the savings challenge they face. So we really need to tackle people’s expectations.
“But I don’t think it is right to say don’t bother, especially as means testing is going to be done away with, given the advent of the single-tier pension. The message needs to be for people in their 20s and 30s ‘don’t put off saving’ and, for those in their 40s and 50s, ‘save as much as you can and you may need to work longer than you think’.”
Last year’s report anticipated the effects of auto-enrolment and other pension reform but this year’s edition reflects a noticeable hardening of messages, talking about retirement at age 70, way beyond the planned state retirement age.
“Putting off retirement makes a big difference: if you delay until age 70 you get an extra 43 per cent income,” says Naismith. “While the Government has plans in place to get the state retirement age up to 68, no one thinks it is going to stop at that age.”
The even bleaker outlook in this year’s report has also been fuelled by the changes in pension projections forced on the industry by the Financial Conduct Authority, which has delivered a much needed reality check.
|Scottish Widows Pensions Report in numbers:|
|45% – The number of UK adults are making sufficient provision for retirement. For workers in the public sector this increases to 59% but is only 33% amongst the self-employed.|
|9.1% – The average savings rate as a percentage of salary. The figure is slightly up from 8.9% in 2012.|
|20% – The number of people of working age saving nothing for their retirement|
|66 – The average age at which workers anticipate retiring.|
|43% – The increase in retirement income that could be achieved by increasing retirement age from 65 to 70.|
|£25000 – The average level of income expected in retirement. For an employee age 30 this would mean contributing £1000 a month.|
“There has also been the change in the maximum growth rate allowed by the FCA since the last report. A growth rate of 7 per cent a year was previously allowed but now we are projecting on the basis of 5 per cent a year. This is just an assumption but it has made a big difference to the numbers.”
Naismith says one area of particular concern is the self-employed as only 33 per cent of who are preparing adequately for retirement compared with 41 per cent of workers in the private sector and 59 per cent in the public sector.
“When we looked at who was saving, the self-employed were behind every other group. The state pension changes help them but some of them still have a lot of ground to catch up. They are not all wealthy business owners. I know it is a cliché but there are those people such as hairdressers who are not putting anything aside at all,” he says.
Widows proposes addressing the undersaving among the self-employed by possibility exempting their pension contributions from National Insurance, like employer pension contributions.
It could be argued that calling for this when the very notion of tax relief for pensions is under question makes this proposal more of an aspiration than a realistic goal but Naismith believes there are genuine, robust arguments in favour of such a move.
“Getting anything out of the Government is difficult at the moment but we are trying to target areas where there is underprovision. There is discrimination against the self-employed in the current tax system. If you are an employer you get NI relief and corporation tax relief but if you are self-employed you only get income tax relief. So it is not outrageous to suggest a fairer way to approach this would be to give them NI relief as well.
“The important thing would be to make sure it goes to those who are not saving and not to those putting in £40,000 a year. Whether the Government will go for it, we do not know yet because we haven’t discussed the idea with them yet.”
Mind the gap
Priming the pump of greater pension contributions from smaller companies is another proposal in the report. While those working for large companies are relatively well provided for, with 53 per cent of those with companies employing 250 staff or more saving adequately, this falls to 39 for those employed by smaller companies.
The report suggests that, while auto-enrolment will go some way to closing this gap, this discrepancy could be further eradicated by giving smaller companies incentives to go beyond the automatic enrolment minimum. And the contributions gap is arguably likely to widen as a result of the removal of consultancy charging, which means smaller companies are now less likely to access pension advice.
Widows’ report suggests the proposed Employment Allowance, which takes the first £2,000 of the NI bill off every company, could form a blueprint for how this could be done. The provider suggests the first £5,000 of employer contribution above the auto-enrolment minimum could count double for corporation tax relief as long as it was not for the directors or connected parties.
One significant factor not discussed in the report is the effect on outcomes caused by the removal of the state second pension under the single-tier pension reforms.
Naismith says the reason single-tier state pension has been missed from the report, even though its effect will arguably have a greater influence on retirement outcomes than auto-enrolment for many people retiring in the next 20 years, is because it has not been fully priced yet. But he agrees there is a potential downside for those who are contracted in.
“People in defined contribution schemes, if they are contracted in, will get £144, but they would in many cases have got more under the outgoing system. And it is right that those in DC will lose, in general, more than those in DB. Those people in their mid to late career, who have already got up to £144 but wont get any more, will be among the biggest losers,” he says.
Scottish Widows is also on the verge of entering the annuity market, where it has not been an active player for many years. Naismith describes the launch as happening in a matter of weeks rather than months.
“We will be starting small and it is likely to be in the area of enhanced annuities.”
While the provider’s state of the nation pension report delivers some hard-hitting messages about the retirement readiness of the UK working population, Widows is less abrasive when it comes to some of the big internal issues facing the industry.
Naismith’s attitude to the debate over the way the rug has being pulled from under consultancy charging is more reflective than some providers and advisers who had also invested in the process.
“In theory, you can write consultancy charging at present. But as it is going to go soon there does not seem to be any sense in doing any more,” says Naismith. “I believe we do have it in place for a few schemes and our pipeline business is being looked at.”
But just because the provider is not going to push the consultancy charging revenue stream to the wire does not mean the lost millions have been forgotten, with the normally measured Naismith critical of the way in which the authorities have conducted the whole affair.
“It has cost us quite a lot of money. Consultancy charging was created because the FSA was trying to accommodate advice into the new system. We have spent time and money trying to implement this over two years.
“We are not against the general principle of it being stopped but to start it and then stop it has not been helpful. By starting it and then stopping it so quickly it has confused everybody and cost us a lot of money.”
Naismith is similarly philosophical on the position of the lifting of the transfer restrictions of the great public-funded competitor to providers such as Widows that is Nest. While at least one unnamed provider is rumoured to be threatening to take the Government to the European Court should it attempt to lift the transfer ban ahead of the 2017 review, Widows will not be doing so.
“We would rather they stayed in place until 2017 but we are not over-excited about it. If pot follows member, it is almost inevitable the cap will go. But we won’t be off to Strasbourg if the Government lifts it before then.”