Tom Murray- Head of Product Strategy, Exaxe
One of the key issues being addressed in the 2012 pension reforms is the reluctance of people to take responsibility for their own future welfare by engaging in long-term savings. This has been handled by entrapping people into pension schemes and playing on their own inertia to prevent them from opting out. At best this could be described as morally ambiguous. Inertia is a key driver behind the strategy to make more people save for their own future and thus ameliorate the looming crisis in state pension funding that is being driven by increasing longevity.
Why has it come to this? Having failed over the decades to get people to start saving of their own accord the government commissioned various reports to try to come up with the answer. The committees thus endowed, notably Lord Turners commission, shied away from the guaranteed answer of compulsory pensions and opted for the approach of soft-compulsion, exploiting the key human weakness of inertia to ensure that a large number of employees who were enrolled would stay aboard rather than actively seek to opt-out.
However, this policy was designed and decided upon at the time of the boom in the UK and amidst the global economic surge. The feeling at the time was that the general feel good-factor would ensure that people would not examine the issue too closely. However, the world has turned and the ever-dominating global financial crisis is changing attitudes across the population rapidly.
The trouble with relying on inertia to keep the numbers up is, that for it to work, it relies on not engaging too strongly with the members so that they don’t think too much about it, especially at the early stages when the annual statements and projections are likely to show poor returns and encourage hard-pressed workers to opt-out or leave after a short time in the scheme. Now that so much of the population is struggling to make ends meet, deductions from their pay packets are likely to be scrutinised far more closely and without persuaders, they are likely to conclude that a pound in the hand now is far more useful than a future income stream that isn’t terribly impressive anyway.
Given this scenario, the industry needs to look at methods of making these reforms work. Inertia is obviously not the answer. Two approaches that might make a difference are either to move to compulsory pensions or to engage with the customer in order to ensure that they fully understand the long-term nature of the savings and have a proper expectation of the likely outputs from annual reviews etc.
Compulsion, while an ideal option, is politically infeasible at the current time. Insufficient effort has been made to increase awareness of the problems with future pension provision and the general public are more obsessed with their day-to-day problems and surviving the current downturn than in worrying about their position in twenty or thirty years. Consequently, the government would effectively be seen to be increasing taxation where they to impose a compulsory pension system and it would engender major public opposition in the current economic climate.
Therefore, the alternative is to reach out and engage with the employees, an approach that runs counter to the idea of basing the whole approach on inertia. By engaging with employees, it should be possible to bring about an awareness of the national problem and how it will affect each of them personally. It should also be possible to educate them about what to expect from a pension savings scheme so that they are not frightened by the ups and downs of the normal investment cycle and should show how they can take control and protect their own future by maximising theircontributions to the scheme.
Those in charge of the qualifying schemes will need to think about how best to reach out to this new pool of members; many of whom will never have been in a formalised savings scheme before. Accessing these new members will be difficult via intermediaries, given the cost of advice, so direct methods need to be considered.
The big plus is that large amounts of the population are now happy to interact via mobile platforms and social media. The advantage of this is that you are engaging with them on their own terms and this kind of interaction is highly automated and therefore low-cost; a key feature in schemes where cost control is a huge factor.
As the new audience is generally, although not exclusively, from the middle to low paid sector, smartphone apps would seem to be the way to go. These would allow people to see the value of their own pensions and projections of future income and could also give them control of their investments between the selected funds. All of this would contribute to making employees feel in control of their own future and would encourage them to stay within the scheme.
Without this level of engagement, the economic downturn means that financial hardship will overcome the inertia being depended upon, resulting in a much higher level of opting out than is currently expected. If the numbers don’t add up, future increases in costs for those who are in the scheme are unavoidable. This will also lead to more opt-outs and begin a death spiral in terms of viability for the whole project.
I believe the economic downturn means that a complete rethink of the strategy for auto-enrolment needs to be undertaken before we end up with a costly failure that will inhibit future attempts to make people take responsibility for their own future.
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