Too broken? Pensions ain’t working

The UK pensions and savings system is more broken than ever – and it’s not getting better

With our recent political landscape resembling a Tarantino-produced version of musical chairs it’s all too clear that some of our pressing problems just can’t be addressed within the mayfly-like duration of a political term of office. Climate change for example – too big, too long term – but something that will bite us all if we don’t fix it. It can seem so big that we feel helpless to do anything about it – but ultimately the only way to fix it is for us all, as individuals, to take control, to do our bit.

It’s the same story with how we finance how we live our lives, throughout our lives. This used to be called “retirement” – but that’s a quaint old notion from a time when we all worked into our sixties, and then lived just a little longer, going on a few cruises, playing golf and cuddling our grandchildren.

Life’s not like that anymore – we’re living much, much longer; many of us aren’t intending to, or can’t afford to, stop working; we certainly don’t work for one employer our entire life; for the vast majority of us post baby-boomers there is simply no big pot of money to live off, no extended cruises to look forward to.

Try googling “retirement” and look at the images. We’re living in a fantasy world where “retirement” means a life on yachts and sun-kissed beaches. For the vast majority of us the reality of how we’ll be living in our 60s, 70s, 80s, 90s, is very, very, different.

 In your dreams
In your dreams

The pension and savings system in the UK, and in the rest of the developed world, was designed for a very different time. Our public sector pensions are increasingly unaffordable – fixing the deficits is a gigantic task, and if they can’t be fixed the next step is cutting the payouts, breaking the promises to teachers, nurses, firemen. The funding problems hit occupational pension schemes just as much – employees of BHS and Tata Steel are waiting to find out what’s going to happen to their pension pots, some of the Post Office workers already know they’re being pushed into schemes that will pay out less.

It’s not working. It’s too big a problem for a (at best) 5 year term government to fix, and at the current rate the lifespan of a pensions minister is measured in months not years. In the end, like climate change, it will actually come down to each of us to take back control of our money, of how we finance how we live.

I’m not a pensions expert at all (apparently much like the new not-minister for pensions). But even I can see that the current system is just not working. And despite the presence of some brilliant people in government there just isn’t the time, nor the will, nor the urgency to fix it. It is too broken.

We don’t need to fix the old system – we need to make a new one to replace it.

We’re not listening, and we’re not saving. (And we don’t care) 

Most of us don’t save enough. Not nearly enough. There is a massive shortfall between what we need for “retirement” and what we have. This is the same the world over.

Most of us don’t care enough. Our parent’s generation did very well – generous state pensions, even more generous employer pensions. We’re surrounded by people who are right now, under our noses, enjoying a comfortable retirement.

Given that, it’s all too easy to believe that it will all be OK, that somehow it will work out. Much of our attitude to long term finance has been shaped by abrogating responsibility for it to someone else: the state, your employer, the housing market.

I think my generation kind of know that the state isn’t coming to our rescue, that the bits and pieces of occupational pensions we may have picked up as we bounced from job to job don’t add up to a gilded retirement. We’re already gearing up for a lifetime of working.

What "work to live" really means
What “work to live” really means

But we’re not quite ready to take control of long term finances for ourselves yet. We don’t trust people in “finance” (with good reason), and it’s ferociously difficult.

Auto-enrolment into pensions is a once in a lifetime opportunity

In an attempt to get more of us on the bottom rung of the savings ladder, the government is midway through “auto enrolment” – switching the default practice for employers to putting employees into a pension, rather than making it optional. It’s swapping one form of inertia for another.

It’s working – kind of. Relatively few employees are opting out, and thus far 6million or so have started some form of pension that they wouldn’t otherwise have done. All being well by the time we’re through the whole 6 year programme (2018) maybe 10m people will have started saving for their future.

That’s the good news.

Wouldn’t it be brilliant if many of these newly saving millions got the habit? If they became sufficiently confident and able to take control of their long term savings? Imagine – an entire generation of empowered savers in charge of their own destiny, not reliant on an ever dwindling, unaffordable handout?

Lambs to the slaughter? 

Auto-enrolment is a well intentioned policy that’s in danger of failing an entire generation of new savers.

Ostensibly all is rosy. Employers are “complying”, and we’re now into the long tail of 1.8m or so very small employers that comprise the backbone of the UK’s working population.

But the pathology of a deeper, future crisis is all too clear to see. Far from being gently and happily nudged into a happy land of happy saving the millions currently being auto-enrolled are being sold a pup. The amounts they are saving aren’t enough for a nest egg, and won’t be, and the market they are being put into is riven with all the worst ills of the financial world. We’re storing up a lot of disappointment and anger.

This is in many ways an experiment in financial services for the mass market. Not brokered through fee-taking agents but a self serve, DIY market where the buyers (in this case hundreds of thousands of small business owners) are expected to make big, long term financial decisions without help. And without protection.

They are exposed to a workplace pension market that is not OK:

  • complicated language designed to mislead
  • unfair and hidden charges – some providers even have the chutzpah to market themselves as “free”
  • middlemen fishing fees out of your money without asking (undeclared charges)

These are – sadly – all run of the mill nasties that are just part of the financial landscape, and for many of us merely confirm that we’re right to be cynical.

some promises are hard to keep
some promises are hard to keep

But workplace pensions for the mass market have some specific ills in the form of risky providers that leave thousands of employers and millions of workers at risk of ending up in a bad place.

Taking out the trash won’t be enough for the mass – the system’s a casino where the house always wins

Notwithstanding a number of bad providers hawking their wares, there are systemic issues here that mean the interests of the market and the interests of the providers are not, and never will be, aligned.

The best, most visible, example of this is the annual management charge (AMC) applied annually to the savings you’ve ‘amassed’. It looks like a tiny percentage – 0.5%, or 0.75% – and of little consequence compared to the “free to set up” or “£300 set up fee” you might be looking at.

But it’s not innocuous. It’s an annual fee taken from your entire savings ‘pot’ every year. Win or lose. Every year you’ll pay more money. Every single year. But the service you receive is the same. Heads they win, tails you lose.

This is not the fault of the pension providers, it’s just how the system works. In fact the size of the annual management charge is one of key aspects that makes a pension qualify legally for auto-enrolment. The charge applied-as-a-percentage annually is deeply embedded in the system – and means that no matter how well meaning the interests of the provider and your interests are not aligned.

Even more aggravating, there are a ton of other charges applied to your money that you can’t even see – that the industry doesn’t want you to know about. In aggregate these can halve, or in some cases completely wipe out, whatever savings you thought you had.

heads we win
heads we win

I can’t think of another market, anywhere, where you pay more over time just because. I can’t think of another market, anywhere, where it’s OK to take your money without asking. Pensions are a casino where the house always, always wins.

The system of incentives in managing pensions just does not work in a mass market context. The people managing the money get paid anyway. What we need is a system where the outcome, better savings, is incentivised through the whole chain. Such a system would be much, much healthier for all.

What’s needed is a reset. Trying to fix the existing mess is a Sisyphean task. We’re much better off designing a new system of long term saving from scratch – where the needs of the savers and the incentives in the system are aligned.

We now have the technology to enable such a system – lean, transparent, fair – that works for the mass. That gives power to ordinary people, that helps a generation to get the savings habit. All we need is the will to make it.

 

 

 

 

 

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