The new Nest scheme is a welcome step towards tackling apathy at the lower end of the income spectrum, where the 12 million not saving at all for retirement are concentrated. Automatic enrolment gets the balance right between using the power of inertia in favour of saving and allowing individual choice.
But real concern remains about the impact of mass means-testing of pensioners on incentives to save in Nest. The Government has tried to park this issue but it will not go away.
The challenge of building confidence that it will pay to save in Nest is pervasive. It will have to be addressed before 2012 if the launch of personal accounts is not to be undermined by doubts – ill-informed or not – about whether it will be worthwhile saving.
The simplest and cleanest way to resolve this problem is to end the mass means-testing of pensioners. A citizen’s pension, set at the current level of the pension guarantee credit, would ensure no pensioner lived in poverty and all had a firm foundation on which to save. In light of current financial circumstances, this is a long way off but we believe it is the only answer to tackle the complexity and unfairness in the system and ensure it pays to save.
But even in an environment of persistent large-scale means-testing, much more can be done. There are some specific groups on whom the “pays to save” concern should focus – those starting to save very late in their working life and those on housing benefit in retirement, with its steep marginal deduction rate. Others, such as those with very high credit card debt and low incomes, may be well advised to pay off debt first.
The charging structure for Nest only underlines how important it is that people being auto-enrolled need advice. The combination of an annual management charge and contribution charge will mean people nearing retirement saving very low sums will have little to show for it when they retire. Employers will resent the bureaucracy of administering such tiny payments, and workers will be shocked when they draw absurdly small pensions.
In the first of a weekly series of articles in the runup to the general election, politicians try to convince Money Marketing readers why you should vote for their policies
The scheme would be more cost-effective and charges would be lower if those with very little time to retirement and those on the very lowest earnings were excluded from the scheme but they will not know this is the best option for them unless they get personalised, reliable advice.
The Government must publish its own analysis of the interaction between Nest and means-tested benefits as well as the outcomes for different saver profiles annually. The interaction will change over time and the Government must be open to ensure that confidence among the vast majority who will have no such problems is maintained. If “at-risk” groups can be identified and tracked, then they can be given appropriate, targeted advice.
People need to be equipped to make informed choices about their retirement planning and products must be simplified if people are not to be put off. That 47 per cent of people have no idea what their retirement income will be is another piece of evidence that people are put off by the complexity of pensions.
Not everyone can afford personalised financial advice to inform their decisions. Independent, generic financial advice must play a part in helping people understand the options available to them and how they can get the best from their savings.
Government needs to be much more ambitious in this area. We need a nationwide network that can meet the needs of the financially excluded. In an ideal world, it would be free, or at the very least low cost, which would involve Government and industry working in partnership. That is necessary to tackle the fact that too many people lack the skills and the support to take responsible long-term financial decisions for themselves.
Finally, the Government must do more to support the occupational pension schemes offering the best retirement packages. Changes to accounting rules have left fund managers diving for cover in the past but the regulator and accounting bodies should not push things too far, after all, managed risk can reap huge rewards.
A more stringent deregulatory review would help to foster a closer relationship between the industry and the Government, which is imperative.
There are no quick fixes. It will take a sustained effort on the part of the Government, opposition parties, business and the media to change the habit of many people’s lifetime – putting off today what can(not) be done tomorrow.