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How can we convince consumers that paying into a pension is worthwhile?

When I was doing the media rounds to launch our UK pension report, one issue was raised time and time again by journalists. How can people be sure that if they put their hard-earned money in a pension, they will get back enough to make it worthwhile?

This question reflects a fundamental mistrust of pensions. One reason is the wide publicity given to the problems of Equitable Life and some final-salary schemes. Then there is a lingering belief that our industry has a rip-off mentality, which has not been helped by talk of 0.3 per cent a year being a realistic charge for pension provision. Another reason is that the impact of pension credit means saving will not be worthwhile for some people. Finally, many people have little idea of what their pension will actually be, but do not think it will be good value for what they pay in.

The first two reasons require restored trust in our industry, which we must tackle vigorously. The third is a matter for Government and is partly addressed in the long term by the White Paper. But the fourth is a matter of effective communication and so should be more straightforward to tackle.

We do already provide information to consumers on how much they may get back. Most receive a projection illustrating potential benefits when they start their pension and a yearly statutory money-purchase illustration. But whether we really communicate with them is another matter altogether.

For a start, the different illustrations are inconsistent. Most provided at the new business stage are in absolute terms at three annual rates of return, normally 5, 7 and 9 per cent. SMPI illustrations are presented in today’s money or is it today’s earnings? There is only one growth assumption – normally a 4.5 per cent annual real return – and the annuity assumptions on escalation and spouse’s/ dependant’s pension may well be different. If we are not confused by this, our clients certainly are.

What is the answer? Part must be sensible regulation, so that all illustrations are on a consistent basis. The FSA has wrestled with this for several years and is due to start a consultation in October. There are significant issues to be ironed out, including whether consumers are more likely to be misled by a single illustration or several on different assumptions. The regulations should ensure the information is consistent whether the pension is insured or self-invested.

It is very important that the adviser voice is heard in the consultation. No one understands the problems that consumers face better than those who have to explain to them the mass of material they receive.

What can we do before the regulations change? Providers need to make illustrations as straightforward and clear as regulations allow. Almost all major insurers have signed up for the Association of British Insurers’ customer impact scheme, which states: “Illustrations should give customers a clear idea of product charges and possible benefits so that the customer can better compare products.”

Helping with charge comparisons is one of the key purposes of illustrations and if this principle is achieved in practice it should also help customers understand what they might get back.

Beyond that, we should give customers some feel for possible outcomes. One of the ideas behind SMPIs was that consumers could track their prospective pension from year to year and understand the effect of investment returns and changing annuity rates. Whether this has been achieved is open to debate but the principle is sound. Setting expectations of what a pension may pay out at retirement is essential if |we are to avoid storing up problems for the future. There is an obvious role for advisers in helping clients to understand these issues.

To encourage consumers to feel that pensions are worth having, we need to be positive about the benefits of pensions – significant tax advantages, generally low costs and the prospect of financial security in retirement. We must recognise that annuity rates appear low to the layman and must get across the message that an annuity guarantees an income for as long as they live.

Ian Naismith is head of pensions market development at Scottish Widows


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