developing solutions for funding retirement

An age-old problemdeveloping solutions for funding retirement

1 An age-old problem: developing solutions for funding retirement

contentsContents

5 Foreword

8 CIIanalysis:Thescaleoftheproblem

8 Summary

9 Longevity

10 Lifeinsurance

11 TheState

12 Thegeneralpublic

14 Barrierstolong-termsavings

16 Theattractionofproperty

17 Long-termcareinsurance

18 TheGovernment’sresponse

21 Willthesereformsbeenough?

24 Whattheexpertssay

25 Asnapshotofthearguments

26 SteveWebb,MP(MinisterofPensions)

27 BillGalvin(ThePensionsRegulator)

29 DrYvonneBraun(AssociationofBritishInsurers)

31 DrAdamMarshall(BritishChambersofCommerce)

32 LawrenceChurchill(NESTCorporation)

34 StevenCameron(AEGON)

36 PhilHickley(AxaUK)

38 DrRosAltmann(SagaGroup)

40 RonnieMorganandRobinNimmo(ScottishLife)

42 DavidNish(StandardLife)

43 ProfessorPhilipBooth(InstituteofEconomicAffairs)

45 ChrisCurry(PensionsPolicyInstitute)

46 DrPatrickNolan(Reform)

48 WendyvandenHende(PersonalFinanceEducationGroup)

50 JackieSpencer(MoneyAdviceService)

53 ConclusionandCIIview

56 Whotocontact


foreword

An age-old problem: developing solutions for funding retirement Raisingtheleveloflong-termsavingsforretirementisatoughandcomplextask,withnoeasysolutions

andnofoolproofmethodtotestnewideas.Itisalsosomethingthatpolicymakersandtheindustry

havebeenwrestlingwithforyears–attemptingtodeveloplastingsolutionsinthefaceofaconstantly

changingeconomicandregulatoryenvironment,aswellasincreasinglongevity.Perpetualreformbrings

itsownproblemsaseachroundleavesconsumersandsaversnotjustbaffled,butalsolesswillingto

wanttoengageinasystemthatissubjecttoconstanttinkering.

Thisreportcapturesthecurrentdebate,andprovidessuggestionsabouthowwecantacklethis

importantpublicpolicyissue.Itaddressespensionsandlong-termcareaspartofthesameproblem:the

publicmustsavesignificantlymoreforretirement.

Ourreportbeginswithanoverviewofthescaleoftheretirementproblem.Wedemonstrate,witha

simpletheoreticalmodel,thepotentialcostsfacingtheaveragepersonabouttoenterretirementonce

long-termcareanddebthavebeenaddedtotheequation.Wethenusethisasabasisforcalculating

whatthetotalsizeofthepensionsgapmightlooklikeforallthoseretiringoverthenextfortyyears.In

turnwesummarisethecurrentstateoftheGovernment’sreformsandaskwhetherthiswillincreasethe

levelofsavingssufficiently.

Thisisfollowedbycontributionsfromarangeofexpertsinthepensionsdebate,includingtheMinister

forPensions,SteveWebb,MP.Theexpertsprovidetheirconsideredviewsonthechallengesweface,as

wellwhatpossiblesolutionscouldlooklike.Weareverygratefultoeachofthemfortheircontributions,

whichprovidedifferentandoriginalinsightsintothisimportantissue.

Finally,weconcludebyemphasisingthreeareasthattheCIIbelievesareparticularlyimportantinthe

battletoincreaselong-termsavings:educationaboutsavingforthefuture,trustinfinancialproducts

andadvice,andthestabilityofthefuturesavingslandscape.

Overthenextfewyears,theseage-oldissueswillberevisitedasevidenceaboutwhatworksandwhat

doesn’tfiltersthrough.Thekeyhoweveristoensurethatthiscurrentroundofreformsgiveconsumers

andsaverstheconfidencetheyneedtoengage,andultimately,tosaveforretirement.

David Thomson

DirectorofPolicy&PublicAffairs

TheCharteredInsuranceInstitute

5May2011


Summary• Increasing longevity poses the dual challenge of ensuring that

individuals have enough income for a comfortable life during retirement and sufficient funds to cover the costs of long-term care.

• Increasing longevity also poses a risk to those providers (state and private sector alike) that guarantee the pensions of final salary scheme members. In response, savers are likely to discover that pension benefits will become far less generous over the next twenty years.

• As people face the prospect of reduced retirement income it is very likely that they will be tempted to rely on the state to cover the shortfall. This is a big gamble: in many cases we can be reasonably sure that state benefits will not provide a comfortable lifestyle in retirement, nor cover the costs of long-term care.

• As things currently stand, those entering retirement have not anticipated or planned for the costs of living that they are about to face. Currently many pre-retirees have little savings and carry the burden of significant debts just at a time when their incomes are about to fall.

• Our simple illustrative model suggests that, using the current replacement rate of roughly 30%, the average pensioner would fall short when trying to secure an enough income to adequately cope with day to day living expenses and provide for the costs of long-term care. Assets, including property, may have to be used in order to bridge the gap, and even then the state may eventually have to get involved.

• Saving more, paying down debts and above all else planning for the costs of retirement will be crucial if people want to be sure to avoid having to sell off a large proportion of their accumulated wealth during retirement in the future. It will also help to ease the burden on the taxpayer of paying for our elderly as this proportion of the population increases.

• In the UK there are however, significant barriers to long-term saving including complexity surrounding the UK’s tax system, trust issues due to mis-selling scandals and uncertainties about the future, and a low level awareness about the scale of the challenge that will face individuals entering retirement. Reforms to pensions and long-term care must tackle each of these in turn.

• In response, the Government is introducing a wide range of measures which are likely to change the pensions landscape over the next twenty years and a review of long-term care is also underway. More debate and evidence is needed in order to understand the likelihood of success and identify what else must be done to improve the retirement incomes of the UK’s elderly.

CII analysis: the scale of the problem


CII analysis: the scale of the problemLongevityIncreasing longevity is likely to lead to an increasing proportion of the population demanding

income during retirement for longer and requiring long-term care at some point during their lifetime.

Continuingimprovementstohealthcareandchangestopeoples’workinglivesareensuringthatan

increasingnumberandproportionoftheUKpopulationliveswellbeyondretirementage.According

totheOfficeofNationalStatistics(ONS),in1981lifeexpectancyforwomenwas76.7,by2004-2006it

hadincreasedto81.3.1Overthenexttwentyyearsitisestimatedthatthisdemographictrendissetto

continue–theresultbeingtoincreasethepercentageoftheUK’spopulationthatare65oroverfrom

16%to23%.2

Aslongevityincreases,theproportionofpeoplewhoareveryoldwillgrowthefastest–withthe

numberofpeopleover90expectedtonearlytrebleoverthenexttwentyyears.Asaresultofthis

trend,itisexpectedthatolderpeoples’demandforcareandsupportwillincreasebyaroundtwo-

thirdsoverthenexttwodecades,assumingthatdisabilityratesbyagewillremainconstant.3

Onaverage,aroundoneinthreewomenandoneinfivemenaged65areexpectedtoenteracare

homewiththeriskofenteringresidentialcareincreasingwithage.Currentlytheaveragecarehome

costs£26,000peryearandtheaveragestayistwoyears–thoughasignificantproportionstayfor

morethanfour.4

1ONSstatisticsquotedinSwissRe(Dec2009),The Insurance Report: The Cost of Doing Nothing,p.102Ibid3TheCommissiononFundingofCareandSupport(Dec2010),Call for evidence on the future funding of Care and Support,p.84Ibidp.14


Life insurance

With increasing longevity pensions will become less attractive as private pension schemes look to

control the rising costs of provision.

Thoseprovidingpensionproducts,particularlylifeinsurancecompanieshavebeenaffectedby

increasinglongevity.Overthelastdecadetherehasbeenlimiteddemandforlifeinsurancebusiness

withpremiuminflowsremainingstatic.Atthesametime,manypensionschemeshavehadtopayout

greateramountsaspeoplehavemadeclaimsforlonger.Theoveralleffecthasbeenanetoutflowof

businessastotalclaimsincurredhasbecomegreaterthantotalpremiuminflows.

Figure 1: UK Life Sector Net Business Flows

-30

-20

-10

10

0

20

30

40

50

60

20062005200420032002200120001999

percent (%)

2007 2008 2009

Net business flows

Source:FinancialServicesAuthority(FSA)RetailConductRiskOutlook,February2011,p.38.

Note: New business flows are the excess of premium inflows over claims incurred as a percentage of

claims incurred.

Inresponsetothissustainabilitychallenge,manyemployerswithintheprivatesectorareintheprocess

ofreplacingdefinedbenefitschemes,whichguaranteeaspecificincomestreamduringretirement,with

definedcontributionschemeswhichprovidearetirementincomedependentonthelevelofcontributions

made.In2008,ofthoseprivatesectoremployeesthatwerecoveredbyapension,34%werecoveredby

adefinedbenefitscheme–downfrom55%adecadeearlier.5Thetrendthereforeisforlessgenerous

offeringsforthosewhowishtocontributetoaprivatesectorpension.

Changesarealsooccurringwithregardstopublicsectorpensions.TheHuttonCommissionrecently

recommendedthatpublicsectorpensionsmovefromfinalsalaryschemestocareeraverage

schemesandthattheretirementageofmostpublicsectorstaffshouldincreaseinlinewiththeState

PensionAge.6

5DavidPitt-Watson(Dec2010),Tomorrow’s Investor: Building the Consensus for a People’s Pension in Britain,RoyalSocietyofArtsProjects,p.116IndependentPublicServicePensionsCommission(March2011),Final Report


The StateThe taxpayer will only foot part of the bill – achieving an adequate pension and paying for long-term

care will often be down to the individual.

Theoverallconsequenceofimprovedlongevityisthatpayingforretirementwillbecomemoreexpensive

fortheindividual,increasingthetemptationtorelyonthestateforsupportduringretirement.However,

relyingontheStatemaynotprovideanindividualwithanadequateretirementincomestream,norwillit

necessarilyprotectanindividualintheeventofillhealthordisability.

TheOrganisationforEconomicCooperationandDevelopment(OECD)definesanadequateretirement

incomeasequatingto70%ofpre-retirementincome.However,aftertakingaccountofallretirement

incomestreamsincluding State Pension and any additional benefits,theaveragereplacementrate

intheUKforlowearners(thosewithpreretirementincomesof£15,750)iscurrently51%providing

aretirementincomeofjust£7,875perannum(afterincometaxandsocialsecurity)andforaverage

earners30.8%providingjust£9,702perannum.7

InresponsetothislowreplacementratetheGovernment’spension’sreforms(discussedindetailbelow)

arefocusedmoreonincentivisingincreasedlong-termsavingsratherthanprovidingmoreStatesupport

–thoughitshouldbenotedthattheStatepensionislikelytoriseintimebutnotenoughtomeetthe

70%replacementrate.Inthisenvironment,peoplewillgenerallyneedtosavemoretogeneratean

‘adequate’sourceofincomeduringretirement.

ManyindividualswillalsonotbeabletorelyontheStatetofundmostofthecostsattachedtolong-

termcare.Thecurrentruleisthatanyonewithassetsworth£23,250orabovewillbeexpectedtopay

fortheircareneedsandinmostcases,thevalueofanypropertyownedwillbeincluded.Thereare

importantexceptionstothisrulesuchasifthereisasurvivingspouselivinginthehouseorifthehome

ownersalterthetermsofownershipoftheproperty.8Thereisalsostatesupportwhichcanamounttoa

maximumof£71.40perweek9inAttendanceAllowanceandaRegisteredNursingCareContributionof

£108.7010perweektohelpcovernursinghomefees.Nevertheless,evenwiththeseadditionalformsof

Statesupportalargeproportionofthepopulationwouldbeexpectedtocoverasubstantialchunkofthe

costsoflong-termcare.


7OECD(2009),United Kingdom: Highlights from OECD Pensions at a Glance 8EmmaSimon(July2009),Long-term Care: How to Beat the Meanest of Means Tests,Telegraph9FiguresobtainablefromDirectGovwebsite:

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/BenefitsTaxCreditsAndOtherSupport/Disabledpeople/DG_1001871010BrownlowWealthManagementLtd(April2010),Factsheet: Registered Nursing Care Contribution


The general public: high in debt, low in savingsWith paying for retirement being increasingly the responsibility of the individual, it is vital that people

start saving more now and pay off their debts before they reach retirement age. Evidence suggests,

however, that people are failing to act in this regard.

From1995toearly2008thesavingsratiointheUK,ameasureoftheamountofdisposableincomethat

issavedbyhouseholds,fellfromjustover10%tojustunderzero.Overthesametimeperiodhousehold

debtasaproportionofincomerosefromjustunder100%to150%.11Asaconsequenceofthisrelatively

lowsavingsandhighdebtenvironmentroughlyhalfofBritishhouseholdshavenetfinancialwealth(all

householdassetsincludingpensionslessliabilities)of£5,000orlessandaquarterofthepopulation

havenetfinancialwealththatis‘negligibleornegative’.12

Whilstitmustbenotedthatthedistributionofnetfinancialwealthdoesincreasewithworkingage,

peakingjustbeforeretirement,therearestill25%ofhouseholdsinthepre-retirementagebracket(55to

64)whohavenetwealthofaroundjust£900and50%whohavenetwealthofaroundjust£18,000.13

Forits2011reportonretirement,Avivasurveyedmorethan5,700consumersagedover55inorderto

betterunderstandthespendingandsavingtrendsoftheUK’sover55s.Oneinfiveofthisgroupsaid

thattheystillneededtorepaytheirmortgageandowedanaverageof£65,107.Overhalfofthepre-

retirees(aged55-64)didnotbelievethattheywouldbedebtfreebeforetheir65thbirthdayand16%did

notfeeltheywouldbedebtfreeby70.14

Withregardstosavings,Avivafoundthatoneinfiveoftheover55shadvirtuallynosavingsatall.Aviva

alsofoundthatthoseaged55-64aremorelikelytohavenosavingsthanthosewhoareretiring(65-74)

andthelong-termretired(75yearsorover)suggestingthat‘thenextgenerationtoretireislikelytofind

itconsiderablytougherfinanciallythantheoldergeneration.’15

Theoretical case study: our illustration of the potential costs when entering retirement

Thesetrendshavelefttheaveragepersonenteringretirementfacingapotentialshortfall.Even

aftertakingintoaccountcapitalheldinassetsthathasbeenaccumulatedoverthecourseofa

lifetime,factoringinallthetrendsdescribedabove,anaveragepensionermaynotbeabletolive

comfortablyandaffordthecostsoflong-termcare.

Considertheaveragepersonjustenteringretirement.Theirlifeexpectancyat65is17.6years

requiringaretirementincomefortheentireperiodof£388,000tomeetthereplacementrate

of70%.16Ifthestatisticsaboutpersonaldebtinretirementdescribedabovearetakeninto

account,thesepensionersmayalsobepayingdownmortgagedebtofaround£50,000overthe

periodand,iftheyareunluckyenoughtogetillmayhavetopaylong-termcarefeesforfour

years,whichwouldresultinanoutlayofroughly£104,000. The sum of all these outgoings is

about £542,000.

11 FinancialServicesAuthority(February2011)Retail Conduct Risk Outlook,p.2112 Ibidp.4413 ONS(2009),Wealth in Great Britain: Main Results from the Wealth and Assets Survey 2006/2008,pp.33–3414 Aviva(March2011)The Aviva Real Retirement Report: Issue 5,p.415 Ibidp.1016 Ourmodelmakestheassumptionthatthisincomestreamisneededtocoverallcostsotherthanlong-termcareandmortgagedebt.


Currently,anaveragepensionergetsaretirementincomeof£9,702perannumwhichwould

equateto£171,000overa17.6yearperiod.Excludingpensions,thosejustenteringretirement

haveincomeinotherassetsworthonaverage£338,00017ofwhichthemajorityistiedupin

property.And,assumingthepensionerrequireslong-termcareduringretirement,theymaybe

abletoreceiveanadditional£37,460inStatesupportoverthefour-yearperiod.The sum of

all this potential income is £546,000,whichjustmatcheswhatthatpensionerrequiresforan

adequateincomeandtomeetlong-termcareforfouryears.

Therealityisthatmanypensionersdonotliveadequatelyduringretirement.Theirpension

incomeisinsufficientandsomeareputinthepositionwheretheyhavetousethecapitaltied

upinotherassets,includingproperty,tomeettheadditionalcostsoflong-termcare.TheState

hastointerveneonceapensioner’sassetsfallbelow£23,250,andresearchfromtheLocal

GovernmentIntelligenceUnitsuggeststhatcurrently25%ofself-fundersrunoutofmoneyand

ultimatelyfallbackonthestatesafetynet.18

Savingmoreandpayingdownalldebtsarewaysinwhichanaveragepensionercanmitigate

againsttheriskoflosingtheirassets.Intheabovescenarioforexample,ifthepensioner

successfullyachievesaretirementincomewithareplacementrateof70%andpaysoffalldebts

early,thenthiswouldensurethattheyareleftwithassetsworth£270,000.19

What this means for the overall pensions gap

InSeptember2010,AvivapublishedresearchpredictingthattheUKwillhaveanannualpensions

gapof£10,300perpersonforallthoseretiringoverthenextfortyyears,and£317.5bnoverall

perannum.20Thiscalculationlookedatthediscrepancybetweenwhatincomepeoplewillneedto

liveadequatelyduringretirementandwhattheycanexpectfromtheirpension.Itdidnotfactorin

theneedforlong-termcareorpayingdowndebt.

Tofillthisgapinthedebatewekeptmanyoftheaboveassumptionsabouttheaverageperson

enteringretirementandappliedthesetothetotalpopulationexpectedtoretireoverthenext

fortyyears.21Wefurtherassumed,inlinewiththeDilnotCommission,thataquarterofthose

enteringretirementwouldrequirelong-termcareforfouryears,andthataquarterwouldalsobe

payingdowndebtsof£50,000.Inthisscenario,theaverageannualpensionsgapperpersonis

significantlyhigherthanpredictedbyAviva–£14,500perpersonperannumand£451bnoverall

perannum.Accordingtothismethodology,thetotalsizeofthepensionsgapwouldequateto

£8trillionoverthisperiod–nearlysixtimesUKGDPin2010.


17 ONS(2009)Assets and Wealth Survey,p.1218 J.Carr-WestandL.Thraves(March2011),Independent Aging: Council Support for Care Self-Funders, Local Government Intelligence Unit,pp.7–819 AssumesthatassetsandGovernmentcontributionsstaythesame20 Aviva(Sept2010),Mind the Gap: Quantifying the Pensions Gap in the UK21 Aviva(Sept2010)predictsthat31millionpeoplewillretireintheUKoverthenextfortyyears.


Barriers to long-term savings If we are to tackle the current low savings environment we must understand what conditions exist to

put people off saving for retirement. Complexity, awareness and trust are three of the key factors that

have been identified by experts.

ComplexityMichaelJohnsonfromtheCentreofPolicyStudieshasarguedthatcomplexityisthemainbarrierto

savingintheUK–particularlythecomplexityofthetaxsystem.Inresponse,hispaperarguesthatthe

GovernmentshouldbringIndividualSavingsAccounts(ISAs)andallpensionsavingsclosertogetherto

combine‘theinstantaccessofISAswiththetaxadvantagesofconventionalpensionsavings’.22

Aegonalsocametotheconclusionthatthecurrentpensionsystemoftaxandotherincentivestosave

is‘verycomplex,notunderstood,anddifficulttodescribetopeople.’IndeedAEGONnotedthat‘it’s

hardtooverstatethetimeandeffortresearchersputintoexplaining–eveninsimplifiedform–thehigh

levelessentialelementsofthesystem’whenrunningfocusgroupslookingintoincentivesforlong-

termsaving.23

AwarenessAssociatedwiththeproblemsofcomplexityarelowlevelsofawarenessaboutlong-termsavings.When

reflectingonitsfocusgroupsessions,Aegonnotedthattaxadvantagesofsavingthroughapension

werenotmentionedbyparticipantsatallandthetaxbenefitsofISAswereonlymentionedonce.

Similarly,inrecentsurveyundertakenbyAvivaitwasnotedthathalfofallrespondentsthoughtthat

50%orlessofpreretirementincomewouldbesufficientduringretirement24–significantlylessthanthe

ratiossuggestedbytheOECDandtheTurnerReport.25

Lowlevelsofawarenessalsopersistregardingthecaresystem.AccordingtotheDilnotCommission’s

CallforEvidencemanypeopledonotunderstandhowthesystemcurrentlyworksincludingthat

theymayneedtopayfortheirowncare(underthemeans-testedsystem).Thereisalsoconfusion

overtheroleofdifferentpartsofstatesupport–‘forexamplewhytheNHSisfree,disabilitybenefits

areuniversal,butsocialcareismeans-tested.’Therearealsocomplicatedandmultipleassessment

processesanddifferentpartsofthecareandsupportsystemdonotalwaysworkverytogether.26

TrustLowlevelsofawareness,stemminginpartfromthecomplexityofthesystemarecompoundedby

lowlevelsoftrustfollowingmis-sellingscandals,theapparenthighcostofpensions,andacontinual

‘movingofthegoalposts’byGovernment.

22 M.Johnson(June2010),Simplification is the Key: Stimulating and Unlocking Long-term Saving,CentreforPolicyStudies,p.VIII23 AEGON(January2011),Towards More Effective Saving Incentives: AEGON’s Conclusions from Independent Research,p.724 Aviva(September2010),Mind the Gap: Quantifying Europe’s Pension Gap,p.1225 LordTurner’sCommissionsuggestedanetretirementincomeof67%ofpre-retirementnetincomeforamedianearner,70%foralowearner,and50%for

ahigherearner26 TheCommissiononFundingofCareandSupport(December2010),p.17


Mis-selling

MichaelJohnsonarguesthattherehasbeen‘anearfatalerosionoftrust,fuelledbymis-sellingscandals,

excessivecostsandalongperiodofpoorinvestmentreturns.’Asaconsequencethepensionsindustry

facesaregulatorybacklash.Theindustrymustthereforeembracetheroundofreformsstemmingfrom

theFinancialServicesAuthority(FSA)’srecentreviewofretailinvestmentdistribution,includingraising

theprofessionalstandardsofretailinvestmentadvisers.Thiswillhelptorebuildpublictrustandenable

theindustrytoengagewiththeregulatorina‘crediblemanner’.27

ThisdeclineintrustwaswelldocumentedinasurveyundertakenbytheCIIinlate2009whichfoundthat

oneinfiverespondentswillnevertrustfinancialservicesagainand72%ofpeoplehavenotverymuchor

nottrustatallinfinancialadvisersandlifeinsuranceproviders.28

IntheirrecentRetailConductRiskOutlooktheFSAalsonotedthatpartofthereasonforlimiteddemand

forlifeinsuranceproductsoverthelastdecadehasbeentheknockoneffectof‘pensionandendowment

mis-selling,aswellastheissuessurroundingEquitableLife’.29

Costs of pensions

TheRoyalSocietyofArtsalsoproposesthattrustisattheheartofaneffectivepensionsystem.‘Savers

needtotrustthat,evenwhenthereareunforeseencircumstances,thepensionfundwillberunintheir

interests.’30Levelsoftrustare,however,likelytobenegativelyaffectedbythefactthatpensionsarefar

morecostlyintheUKthanabroad.Theauthorwrites‘thefeeschargedonpensions(intheUK)arevery

large,andofhugesignificanceindeterminingthesizeofthepension.’31Theynotethata1.5%charge

perannumtranslatesinto37.5%overthelifetimeofthepensions.Andwhatistrueforcostisalsotrue

forreturns–a1%lowerreturnwillgivea25%lowerpension.32

Inresponsetothechallengeofcreatingacheaperpensionwithbetterinvestmentreturnstheauthors

looktotheNetherlandswhichoperatesCollectiveDefinedContributionschemes.Theseschemesare

effective,theauthorsargue,becausetherisksliewiththecollectivenottheindividual,thisallowsfor

investmentinassetsyieldinghigherreturns,andthatthemembersofthecollective‘donotneedtopay

anagententirelytomitigatethisrisk,ashappenswiththepurchaseofannuities’.33

Moving the goalposts

AEGONalsonotedthatthereisageneralrecognitionthatthepensionsystemischangedonaregular

basis,andisunreliable–indeedthereisa‘strongsenseofcynicismaboutthesustainabilityofpolicy.’34

Peoplecannotbeexpectedtoeffectivelyplanforthefuturewithoutastableenvironmentinwhichto

operate,particularlywhentherearesomanyothervariables,suchasthemacroeconomicenvironment,

whichwillremainuncertain.


27 M.Johnson(June2010)28 CII(February2010),What we talk about when we talk about trust,p.1229 FSA(February2011),seenote11above,p.3930 D.Pitt-Watson(December2010),seenote5above,p.1931 Ibid,p.1832 Ibid,pp.17–1833 Ibid,p.2134 AEGON(January2011),seenote22above,p.7


The attraction of propertyTherelativelylowdemandforinvestinginpensionfundsisinstarkcontrasttothedemandfor

property.Fromthe1980stothemid2000shomeownershipincreasedsubstantiallyfroman

alreadyhighlevelofaround60%to70%by2005.

Figure 2. Home Ownership in the UK 1981–2005

55%

60%

65%

70%

75%

Owner occupied % of total dwellings (RHS)

1996199119861981 200110,000

14,000

16,000

18,000

20,000

12,000

Source:CMLHousingFinanceIssue022007,p.3

AEGON’sconsumerresearchsuggestskeyattractionsofpropertyinclude‘transparency,ease

ofunderstandingandherdbehaviour/peereffect’–noneofwhicharegenerallyassociatedwith

investinginpensions.Worryinglythough,thedecisionofinvestorstofavourpropertymaybe

storingupissuesforthefutureincluding:

• ‘Aconcentrationofdemandforretailassetsinresidentialproperty,furtherfuellinganasset

pricebubble–whichwillultimatelycorrectatwhatpriceforsavers?

• Concentrationofriskforsavers–injustoneortwoassets,notevenoneortwoassetclasses;

• Furtherleveragingofthatrisk–throughtheuseofmortgagedebttoacquirethoseassets;

and

• Alackofsolutionstodecumulatepropertywealth–withoutriskofoutlivingtheirassets’35

35 N.Hurman(March2011)What Motivates Us to Save? Creating Effective Incentives for Public Engagement in Pensions,CIIThinkpieceno.52,pp.2–3(www.cii.co.uk/thinkpiece)


Long-term care insurance Another barrier to long-term savings is the potential costs of long-term care which reduces incentives

to accumulate assets worth over £23,250. A means tested system where some pensioners must pay

‘catastrophic costs’ for care, ‘does much to undermine pension saving’.36

Inresponsetothepotentiallymassivecostsoflong-termcare,insurancecanprovidepeoplewith

protectionincaseofillhealthanddisability.However,takeupofprefundedlong-termcareinsuranceis

typicallylowrightacrosstheworldwithFranceseeingthehighestratesofaroundjust15%.

JamesLloydoftheStrategicSocietyCentrearguesthatthereasonsforlowtakeuparemainlylinked

todemandsidebarriersincludingthecostoftheproducts,uncertaintyovertheavailabilityofcare,

ignoranceoftheriskofneedingcare,inertia,andthecomplexityofproducts.Hereiteratestheview

posedbyothersthatprefundedlong-termcareinsuranceis‘neverlikelytoproveanadequateresponse

totheproblemsposedbythelong-termcarefundingsystem’.37

ThesystemthereforeneedsradicalreformandLloydpressesforastate-sponsoredpublicprivate

partnershipinsuranceschemeratherthanare-bornprefundedlong-termcareinsurancemarket.He

arguesthat‘ratherthantensofthousands’suchapartnership‘wouldresultinparticipationlevels

measurableinthetensofmillions’.38

TheCommissiononFundingofCareandSupportwassetupbyGovernmentasanindependentbody

tomakerecommendationson‘howwecanachieveanaffordableandsustainablefundingsystemfor

careandsupport,foralladultsinEngland,bothinthehomeandothersettings’.Itwilllayoutitsfinal

recommendationsinJulylaterthisyear.


36 JamesLloyd(February2011),Gone for Good? Pre-funded Insurance for Long-term Care,TheStrategicSocietyCentre,p.4837 Ibidp.638 Ibidp.7


The Government’s response: changing the retirement landscape The Government’s reforms are aimed at breaking down the barriers to saving whilst minimising the

cost to the taxpayer. Whether or not in they succeed in this regard they nevertheless represent a

radical reshaping of the environment for retirement over the next two to three decades. Below is a brief

recap of what has been decided so far.

Changes to Basic State Pension

What’s changing?

• TheGovernmenthascommitteditselftorestoring the earnings link to the Basic State Pension

whichislikelytocausethestatepensiontorisemorequickly.

• TheGovernmenthasintroducedatriple guarantee,wherebypensionsareraisedbythehighestof

earnings,inflationor2.5%.

• TheGovernmenthasalsoincreased the standard minimum guaranteesothatmostPensionCredit

recipientsseethefullcashriseinBasicStatePension.

• TheGovernmentwantstointroducea‘flat-rate’ Basic State Pension for all,possiblyworthabout

£140perweek.

Implications for pensioners

• ThesechangeswillensurethatrecipientsreceivegreaterretirementincomefromtheirStatepension

andamovetoa‘flat-rate’shouldhelptosimplifythesystembyremovingtheSecondStatePension.

Age-related rule changes

What’s changing?

• TheCoalitionGovernmentplanstobringforwardbysixyearsLabour’sproposalsforincreasingthe

StatePensionAgeto66.

• Theaimisnowtoincrease the State Pension Age to 66 by 2020.Theageincreasefrom65to66will

bephased in from 2018–2020.

• TheGovernmentwillabolish the default retirement agewhichallowscompaniestoforceoutstaff

oncetheyreach65.


• PeoplewillhavetowaitforlongerbeforetheycanreceivetheirBasicStatePensionandsomayhave

toworkforlonger.Abolishingdefaultretirementageshouldmakeiteasierforpeopletobeableto

dothis.


CII analysis: the scale of the problemAutomatic enrolment of employees into occupational pension schemes

What’s changing?

• TheGovernmenthasimplementedaBilltomakeitlawthatallemployersmustautomaticallyenroll

theirstaffintopensionschemesregardlessofthesizeoftheirorganisation.

• Anew,Government-backedworkplacepensionschemeknownastheNationalEmploymentSavings

Trust(NEST)willbeestablishedtosupportsuccessfulimplementationofauto-enrolment.

• Theearningsthresholdatwhichemployeesareautomaticallyenrolledwillbealignedwiththe

personalallowanceforincometax(Note:from2011–12taxyear,ithasbeenconfirmedthatthebasic

personalallowanceforindividualsunder65willberaisedby£1,000,from£6,475to£7,475)


• Automaticenrolmentshouldhelptoincreasethenumberofpeoplewhosaveforretirementby

ensuringthat,bydefault,theyareenteredintoapensionscheme.

Changing pension indexation from RPI to CPI

What’s changing?

• TheGovernmenthasdecidedtoswitchtheinflationarylinkfromtheretailpriceindex(RPI)tothe

consumerpriceindex(CPI).Thisislikelytomeanthatthe value of occupational pensions will rise

more slowlythanpreviously.

Implications

• TheDWPestimatesthatthechangewillreducepensionliabilitiesby£65.8bn.

• Theaffectofthechangewillhowever,belimitedbythe70%to80%ofprivateoccupationalschemes

withlegallybindingrulesthatspecificallylinkpensionupliftstotheRPI.Initsconsultationpaper,

theGovernmentannouncedthatitwouldnotforcetheseschemestoswitchtotheCPI.

Reforming public service pension provision

What’s changing?

• TheHuttonCommissionhasconductedanindependentreviewofthelong-termsustainabilityand

affordabilityofpublicservicepensionprovisionintheUK.

• TheCommission’sInterimReportsuggestedthatmembersofpublicservicepensionschemesshould

havetoincreasetheamountofcontributionstheymake.

• ThefinalreportrecommendedthatpublicsectorretirementagemovesinlinewiththeBasic

StatePensionAgeandthatpublicpensionschemesshouldchangefromfinalsalarytocareer

averageschemes.


Implications

• Thesereformswillreducethefinalpensionpotsofpublicsectorstaffassumingthattheycontribute

thesameamountoftheirincomeasbefore.However,ithasbeensuggestedthatpublicsector

pensionswillstillbemoregenerousthantheirprivatesectorequivalentsafterthechangeshave

comeintoaffect.

Changes to rules on annuities

What’s changing?

• TheGovernmentischangingtherulesonannuitiessothatsaverswillbeabletoleavetheirpension

fundsuntouchedpast75,andthosethatliveonwillnothavetotaketheirbenefitsintheformofan

incomeatall.

Implications

• TheGovernmentarguesthattheproposalsmakeprivatepensionsavingmoreattractivebygiving

individualsgreaterchoiceoverhowtheycanprovidearetirementincomeforthemselvesandusethe

contributionsthattheyhavemade.

Changes to tax rules

What’s changing?

• TheGovernmenthasdecidedthatfrom April 2011,thetotalamountthatpeoplecancontributeto

theirpensionpotwithtaxreliefwillbecutfrom£255,000to£50,000.

• TheGovernmenthashowever,decidedthattax relief should be maintained at the full marginal rate

ratherthanintroducingrestrictionsonhigherratereliefasmanythoughtwouldbethecase.

• Thelifetime allowance from taxwillalsobereducedto£1.5msothatanyonecontributingmorethan

thiswillbetaxed.

Implications

• TheGovernmenthasattemptedtostrikeacompromisebetweentryingtoincreasetaxrevenuesby

targetingthelargestcontributorstopensionswithoutdeterringtoomuchsavingforthefuture.

Reforms to the provision of long-term care• TheCommissiononFundingofCareandSupportwassetupbyGovernmentasanindependentbody

tomakerecommendationson‘howwecanachieveanaffordableandsustainablefundingsystemfor

careandsupport,foralladultsinEngland,bothinthehomeandothersettings’.

• TheCommissionwillalsobelookingatfundinginthecontextofbroadersupportforolderpeople

andotherusersofcareservices.TheCommissionwillpublishitsfinalreportbytheendofJuly2011.


CII analysis: the scale of the problemWill these reforms be enough?Theproposedchangesarewidespread–withnumerousmeasuresbeingimplementedtotackledifferent

publicpolicyissuesatthesametime.Thesheernumberofreformsmakesithardtopredictwhether

theGovernmentwillbeabletoachieveasuccessfulbalancingactbetweenimprovinglong-termsavings

whilstreducingthecostsofStateprovision.

ResearchfromAEGONincollaborationwiththePensionsPolicyInstitute(PPI)39suggeststhatthe

currentsetofreformsshouldleadtoanincreaseinthenumberofsavers,butwillnotnecessarilyleadto

increasesintheoverallstockofpensionsaving.ThisisbecauseoftheassumptioninthePPI’smodeling

thattheproportionofemployeeswhoareactivemembersofprivatesectordefinedbenefitpension

schemesfallsby80%between2006and2035.40

AEGON’sandthePPI’sresearchsuggeststhattheGovernment’sreformsingeneralmaynotbea

‘gamechanger’intermsofincreasingthesavingsratiotoalevelclosertothe70%replacementrate

recommendedbytheOECD.Thereisabigcaveatherethough–theresultsandmodellingwerebased

onafocusgroupof25people,whichmeansthattheresultsarenotrepresentativeofthepopulation

atlarge.

The scale of the challenge to increase savings is massive, and the evidence that the current set of

reforms will successfully break down barriers to saving is mixed. More debate and evidence is needed

in order to understand the likelihood of success and identify what else must be done to improve the

retirement incomes of the UK’s elderly.

On long-term care, the future is unknown as the Dilnot Commission is yet to set out its final

recommendations. Now is an opportune moment to consider this additional problem as part of a debate

about saving and preparing for retirement.

39 Theresultsofthemodellingcanbefoundin:PensionsPolicyInstitute(Jan2011),Towardsmoreeffectivesavingsincentives:areportofPPImodellingforAEGON.

40 AEGON(January2011),seenote22above,p.5


Summary Inordertogainabetterunderstandingofwhatelsemightneedtobedonetoincreaselong-termsavingsweaskedfinancialservicesexpertstoprovidetheirviewsonthepossiblechallengesandsolutionstothisissue.Wereceivedcontributionsfromindividualsrepresenting15differentorganisationsincluding:

• ThePensionsMinister

• ThePensionsRegulator

• TheAssociationofBritishInsurers

• TheBritishChambersofCommerce

• TheNationalEmploymentSavingsTrust(NEST)Corporation

• SagaGroup

• InsuranceFirms:AEGONUK,AXA,ScottishLife,andStandardLife

• Threethinktanks:ThePensionsPolicyInstitute,theInstituteofEconomicAffairs,andReform

• Twoconsumereducationalbodies:thePersonalFinanceEducationGroupandtheMoneyAdviceService

what the experts say


what the experts sayA snapshot of the arguments• Inhiscontribution,theMinisterforPensionsarguesthataflat-ratepensioncoupledwithautomatic

enrolmentwillprovidea‘pensionsystemfitfortheTwenty-FirstCentury’.

• AutomaticenrolmentisalsowelcomedbymanyothercontributorstothisreportincludingThe

PensionsRegulatorandtheABIwhicharguesthatthereformwillbea‘socialrevolutioninretirement

savings’.Manyofthecontributorsalsosupportthenotionofaflat-rateStatePensionwithSaga

Grouparguingthatitwillhelpfuturegenerations‘understandthatthereisonlyacertainamount

theywillgetfromtheState’.

• However,thethinktankReformisnotsopositiveontheproposedchangestothestatepension

arguingthattheflat-ratestatepensioninNewZealandisa‘majorreasonforthelowhousehold

savingsratesinthatcountry’.

• Furthermore,whilstmanycontributorswelcometheGovernment’sproposals,anumberbelievethat

moremustbedonetoensureanadequatestandardoflivinginretirement.TheABI,AEGONandAXA

areparticularlyconcernedthatsavingonly8%ofone’ssalarywillbecomethenorm.

• Inordertoensurethatsavingsareaboveandbeyondthestatutoryminimum,contributorspressfor

anumberofadditionalmeasuresincluding:

• Bettereducationandinformationforpeopleofallagesonthebenefitsoflong-termsavings.In

thiscontextsomecontributorsstresstheneedforamasscommunicationcampaign.TheABIadd

thatitisreadytoworkwiththeDWPto‘seizethisonceinagenerationopportunity’.

• Improvingunderstandingthroughfurthersimplificationofpensions.ScottishLifebelievesthat

implementationofasimplifiedadviceregimecouldhelpinthisregard.

• Improvinglevelsoftrustbyensuringamorestableandpredictablelong-termsavings

environment.TheABIandStandardLifealsobelievethattheRetailDistributionReviewcanhelp

toimproveconsumerconfidence.

• Improvingtheflexibilityofsavingsproducts.Tomeetthisaimanumberofrespondentssuggest

designingproductsthatbringISAsandpensionsclosertogether.

• Theabovesummaryrepresentsonlysomeofthethemescoveredbythecontributorsanddoes

notdojusticetotheoriginalityofmanyoftheideasandargumentsexpressedbelow.Wewould

thereforeencouragereaderstothetaketimetoconsidereachofthesubmissionsinturnandtodraw

theirownconclusions.


Steve Webb, MP (Minister for Pensions)Thechallengeswefaceinpensionsaremorestarktodaythanever.

Whentheearningslinkwasbrokenin1980,theStatePensionwas26%ofaverageearnings.By2009it

was16%.ManyarestillmissingoutonafullBasicStatePension,particularlywomen,andlooksetto

retireonapittance.Thisisneitherfairnorsustainable.

Piecemealchangesintroducedovertime,liketheGraduatedRetirementBenefit,SERPSandS2P,have

madethecurrentsystemsocomplicatedandconfusingthatmanyhaveabsolutelynoideawhatthey

canexpectfromthestatewhentheyretire.Manyofourpoorestpensionersfacedwithsuchacomplex

means-testedsystem,failtoclaimthesupporttheyareentitledto.Theoutlookonprivatepensionsis

asbleak.Lessthanhalfofallworkerstodayaresavinginapensionand7millionpeoplearenotsaving

enoughfortheirretirement.ThenumbersofthoseintheprivatesectorsavinginaDefinedBenefit

schemehavebeenfallingfordecadestojustonemilliontoday.Ifthiscontinues,millionscouldfacean

impoverishedretirement.

Thatiswhywehaveactedurgentlytoavertapensionscrisisinthefuture.First,wehaverestoredthe

earningslinkandprovidedatripleguaranteethattheStatePensionwillincreasebywhicheverishigher:

earnings,pricesor2.5%.ThiswillmeanthatsomeoneretiringtodayonafullBasicStatePensionwill

receive£15,000moreovertheirretirementthantheywouldhavedoneundertheoldpriceslink.

Second,ourPensionsBill,currentlygoingthroughParliament,isthenextstepinhelpingmillionssave

fortheirretirementinaworkplacepension.Itwillensurethereisabalancebetweencostsandbenefits

forindividualsandamoreproportionateimpactonemployers,andbringingforwardtheincreasein

StatePensionageto66by2020,amongothermeasures.Thestatepensionageplaysanessentialrole

inensuringthatthestatepensionremainssustainableandaffordableforthefuture.Peoplewillhaveto

worklongerbuttheywillgetasimpler,betterpensionwhentheyretire.

Third,ourGreenPaper,A State Pension for the 21st Century,setsoutoptionsforasimplecontributory

flat-ratestatepension,setabovethecurrentlevelofthemeanstest,currentlyestimatedataround£140

aweek.Wewanttoseeasingle,simple,decentstatepensionthatprotectspeoplefrompovertyand

encourageseffectivesavingforretirement.

Ourproposedreformswillendinequalitiesinthecurrentsystemthatpenaliseswomen,lowearnersand

theself-employed.Peoplewillhaveclarityandcertaintyaboutwhattheywillgetfromthestateandsee

whatothersavingstheymightneed.Andtheywillknowtheywillbebetteroffinretirementiftheysave.

Wewanttoensurepeoplehavetheopportunitytosave.

Thenextgenerationwillfaceadifferentworld,withincreasinglifeexpectancy,thedeclineinfinal

salaryschemesandlowerannuityrates.Theyaregoingtohavetotakegreaterpersonalresponsibility

forsavingfortheirretirement.Reformstothestatepensionwillmakeitfairerandsimplerforfuture

pensioners.Andtheyunderpinplansforautomaticenrolmentintoworkplacepensionstoencourage

furthersaving.Thiswillbeimportantforthoselowandmiddleincomeworkerswhopreviouslyhave

neverhadopportunitytosaveinapensionbefore.Automaticenrolmentfrom2012willbringbetween

5-8millionintosavingforthefirsttime.Itisonlyfairthatgenerationswhowillbenefitfromincreasesin

longevityshareinthecosts,andwewillbelookingatoptionstomakethenewsystemmoreautomatic

inensuringfurtherrevisionsinlifeexpectancytodeterminefutureincreasesinstatepensionage.

Withastreamlined,flat-ratepensionupratedbyourtripleguarantee,andmillionsmorepeople

savingfortheirretirement,wecanmakesure,atlast,thatwehaveapensionsystemfitforthe

Twenty-FirstCentury.


Bill Galvin (Chief Executive, The Pensions Regulator)Theageingpopulationpresentspolicy-makersacrossthedevelopedworldwithoneoftheirbiggest

publicpolicychallenges:howtorequire,incentiviseornudgepeopletowardsmakingadequate

provisionfortheirretirement.

TheUKGovernmenthasoptedforapackageofreformsdesignedtoovercomebarrierstosaving:

includingastatepensionthat’sintendedtobefairer,moregenerous,andbetter-suitedtoprovidea

retirementsavingfoundation,coupledwithautomaticenrolmentintoaqualifyingworkplacepension

scheme,toprovideanearuniversalsecondtierofprovision.

ThePensionsRegulatorhasbeengivenacentralroleinmakingauto-enrolmentasuccessbyensuring

thatemployerscomplywiththeirnewduties.Employerswillneedtoautomaticallyenrolstaff,make

contributionsandregisterwithus,aswellasadheringtosafeguardstopreventstaffmembersbeing

discouragedfromsaving.

Thelargestemployerswillbesubjecttotherequirementsfromnextyear,aspartofa‘staging’process

thatwilleventuallyseethesmallestemployersautomaticallyenrollingtheirstaffin2016.

Theregulatorhasabigjobintermsofeducatingemployersofallsizesintheirnewduties,andhelping

themunderstandwhattheyneedtodoandwhen.Weintendtoestablishacultureofcompliance

amongstemployersandsolimittheamountofregulatoryactionweneedtotake.

ButthisisonlypartofourjobinsupportingtheGovernment’sdrivetoensurethatthesecondpillarof

thepensionssystemisenablingbetteroutcomesinretirementformorepeople.

Indefinedcontribution(DC)schemes,memberscarrythemajorityoftherisk,soitisparticularly

importantthatschemesarewell-runanddelivergoodvalue.Automaticenrolmentwillresultina

significantexpansionofthenumbersofpeoplesavingintoDCpensions.

Inlightofthis,werecentlypublishedadiscussiondocumentonDCschemes,lookingatwhatconstitutes

goodoutcomesformembers.Wehavesetoutsixkeyareaswhichwebelievearenecessaryfor

goodoutcomes:

• appropriatedecisionswithregardspensioncontributions;

• appropriateinvestmentdecisions;

• efficientandeffectiveadministration;

• protectionofassets;

• valueformoney;and

• appropriatedecisionsonconvertingprivatepensionsavingsintoaretirementincome.

It’simportantforeffectiveDCprovisionthatthereisnoambiguityoverwhoisactinginmembers’

interestsandhowdecisionsthataffectmembersaretaken.Thisisnotalwaysthecase,particularlyin

contract-basedschemes.Andit’salsocrucialthatthestructuresthatmanagetheseretirementsavings

arecompetent,resilientanddurable.Thiscanbeachallengefortrust-basedschemes.Theexistenceof

manysmallschemes,thewayinwhichdeferredmembersarecateredfor,andhowmembers’fundsare

treatedatretirementareallchallengesthattheindustryneedstoaddress.



Anincreaseinindividualfinancialcapabilitycouldhaveabigeffecthere,forthosewhocanandwantto

takemorecontroloverprovisionfortheirretirement.Thisisalong-termproject,andwewelcomethe

presenceoforganisationssuchasthenewlyformedMoneyAdviceService.

However,intheshortterm,thechallengesfacingtheindustrycanonlybemetwithaffordablepension

provisionthatoffersinbuiltconsumerprotectionforthosememberswhowillbedefaultedinto,through

andoutofschemes.Andthatiswhatwe’rehelpingtheindustrytoworktoward.

Thepensionslandscapeischangingandissettolookverydifferentinthefuture.Thechallengefor

usistomakesurethatthecollectivedecisionsofemployers,alongwiththeiradvisers,trustees,

andtheindustryasawhole,makethereformprocessasuccessandenablegoodoutcomesfor

retirementsavers.


Dr Yvonne Braun (Assistant Director, Savings & Retirement, Association of British Insurers)

The challenges to get people saving more

Whydopeoplenotsavemorefortheirretirement?TheABI’sconsumerresearchroutinelyasksthis

question.Byfarthemostcommonanswerfromrespondentsisthattheyhavenosparemoney.

Whenlookingatthedatabehindthisresponse,wefindthatthisanswerisgivenbyanalmostidentical

percentageofthenon-saversacrossallincomegroups.Soitwouldappearthatthisisalsoaquestion

ofpeople’sspendingpriorities–inotherwords,peopleonaverymodestincomemayindeedstruggle

tomakeendsmeetandhavenomoneytoprovideforthefuture.Peoplehigheruptheincomescale

mayfeelthattheyhavenosparemoney,butthatmayalsobebecausetheyhavechosentospendtheir

disposableincomeelsewhere,ratherthanonsavingforretirement.

Behaviouraleconomists–andcognitivescientists–havelongidentifiedthereasonsforthis:people

haveastrongfocusontheshorttermandfinditmoredifficulttoengagewiththelong-term.41Theolder,

mesolimbicpartofthebrainisresponsiblefordecisionsabouttheshortterm.Thenewerpartofthe

brain,theprefrontalcortex,isresponsiblefordecisionsaboutthelongerterm.Savingforretirement

requiresadecisioninthepresentaboutthefuture.Butinthepresent,theshort-termviewislikelyto

win.Broadlyspeaking,peoplearethereforemorelikelytospendontheircreditcardsthantheyareto

savefortheirretirement,inthesamewaythatresolutions–forexample,tostartgoingtothegymnext

week–areveryhardtokeepwhenthenextweekactuallyarrives.

However,takingdecisionsaboutretirementsavingsisfurthercomplicatedbythefactthatmanypeople

arenotawareofkeydevelopmentsaffectingretirement.Forexample,peopleroutinelyunderestimate

theirlifeexpectancybyassumingtheywilllivetothesameageastheirparents.Thereisalsoconfusion

abouthowmuchthestatepensionwillprovide–althoughtheGovernment’sdecisiontoconsultona

flat-ratesinglestatepensionwillhelpinthisrespect.

Thecomplexityofdecision-makingcanalsoactasadeterrent–forexample,peoplecanendupnot

takingadecisionwhenfacedwithmanydifferentfundstochoosefrominapension.Andpastmis-selling

scandalshaveundoubtedlyunderminedtrustinthepensionindustry.

Ithasalsonothelpedthatformanyyears,definedbenefitprovisionwastheparadigmofpension

provisionintheworkplace–andthenumbersarestilllarge:in2009,6millionpeoplewereinDefined

Benefitpensionschemes,bothpublicandprivate.Asaresult,manypeopledidnothavetoengage

muchwithretirementplanning.Thishasnotcontributedtoaculturewherepeopleengagecloselywith

providingfinanciallyfortheirretirement.

The possible solutions

Weknowthatcognitivebiasessuchaspresentbiasandinertiapreventpeoplefromtakingdecisions

aboutretirementsavings.Itisthereforerighttosetpensionsavingasthedefault,andtheABIisastrong

supporterofautomaticenrolmentintoworkplacepensionsavings.Automaticenrolmentwillbeasocial

revolutionforretirementsavings,theimportanceofwhichishardtooverestimate.


41 see,NicolasBarrpresentation,April2011,http://www.ebrd.com/downloads/research/news/Barr_EBRD_110401.pdf


Automaticenrolmentwillalsotacklethecomplexityofdecision-making.Toqualifyforautomatic

enrolment,pensionschemesmustofferadefaultinvestmentfund.Thiswillbethedestinationfor

peopleunwillingtoengagewithchoosingafund,ordauntedbychoice.TheDWP’sforthcoming

guidancefordefaultfundsmakesitclearthatthesedefaultfundsmustinvolveade-riskingmechanism

–typically,switchingamember’sinvestmentsfrommorevolatiletolessvolatileassetsasthemember

approachesretirement.

However,defaultingpeopleintoworkplacepensionswillnotbeenough–wemustalsoturnthetide

andhelppeopleengagewithsavingfortheirretirement.Inthisrespect,theGovernment’srecent

commitmenttoasingle,flat-ratepensionwillbeveryhelpful.Itwillputpaidtopeople’sconfusion

abouthowmuchtheycanexpectfromthestate,andwillendthemeans-testingtrapwhichundermines

people’smotivationtosavefortheirretirementbecausetheycannotbesuretheywillreapallof

therewards.

Wealsoneedtomakesurepeopleregaintheirtrustinthepensionsindustry,whichhassufferedfrom

mis-sellingscandals.Avitalreformhereistheretaildistributionreview–itwillendtheuntenable

situationofadviserssellingproductstoconsumersonthebasisofthelevelofcommissiontheyreceive,

ratherthanwhatisinconsumers’interest.TheABIstronglysupportsthesereforms.

However,asfarastrustisconcerned,wetakeissuewithsomecommentators’statementsaboutpension

charges.Theyhavedescribedanannualmanagementchargeof1.5%asrepresentativeoftheindustry’s

currentpractices.Thishasnobasisinreality.PensionchargesintheUKarehighlycompetitive

internationally,andtheABI’smembersareroutinelypricingschemesatorbelowNEST’scharges.Itis

timeforthechargesdebatetoreturntothefacts:Ifpeoplestartsavingearly,andremainpersistent,

theircontribution,theemployercontribution,andtaxreliefshould,overtime,allowthemtoaccumulate

atidyretirementfund.

Inthiscontext,wemusttakecarethat8%ofsalarydoesnotbecomethenewsocialnormforretirement

savings.Itwouldbedangerousifpeoplearelulledintoafalsesenseofsecurityandbelievethey

have“sortedout”theirretirementneedsbyautomaticallyenrollingintoapensionschemepaying

theminimumcontribution.WebelieveitisimportantforGovernmenttostartconsideringnow

whatbehaviouraldevicesareavailabletomakepeopleincreasetheircontributions,suchas“save

moretomorrow”.

Thisbringsmetothefinalpoint.Weneedautomaticenrolmenttosucceedifwereallywanttocrack

theproblemofundersavingintheUK.TheABIbelievesthattoachievethis,weneedaconcertedmass

communicationcampaignbyallstakeholders,includingGovernment,themedia,consumerbodiesand

theindustry,toincreasepeople’sawarenessthatitisintheirbestinteresttosavegivenhowlongthey

willspendinretirement.WearereadytoworkwithDWPtoseizethisonceinagenerationopportunity.


Dr Adam Marshall (Director of Policy, British Chambers of Commerce) AnageingpopulationisnotjustaproblemfortheGovernment,butitisalsooneforbusiness.An

increasingnumberofpeopleinretirementandadecreasingnumberinemployment,coupledwithlow

savingsrates,willallchangetheshapeofthelabourmarketandconsumersocietyintheUK.Retirement

willbecomemoreafluidconceptandbusinesswillcreateflexiblejobstotakeadvantageofthisnew

pooloflabour,thatmaynotwanttoworkfull-time,butstillmayhavealottocontributetotheeconomy.

Theso-called‘greypound’willbecomemoreinfluential,andtheprivatesectorshouldmakethemostof

theopportunitiesitpresents.

Businessdoeshavearoletoplayinencouragingsaving.BCCsupportstheprincipleofthe2012reforms,

andacceptsthe3%compulsoryemployercontributionforallqualifyingemployees.Forthefirsttime,

thepensionsindustrywillhaveacommercialincentivetocreateproductsforthosepreviouslyoutside

thenormofprivatesavings,suchasagencyworkers,orotherswithatypicalworkingpatterns.

Butthesereformscomeataprice.Ultimately,thedirectcost(thecontribution)willbeacceptedby

employersasa‘businessasusual’cost,likeNationalInsuranceContributionsorNationalMinimum

Wageuplifts.However,thehighindirectcosts(theadministration,thecomplexityofpayroll,newstarter

proceduresandexternaladvice)willputarealburdenonUKPLC,particularlysmallbusinesses,where

themarginalcostperemployeewillbehigher.

Successfulregulationworksbecausecomplianceiseasyandthelawisstraight-forward.The2012

reformsriskbeingsocomplexthatalargenumberofbusinessesdon’tcomplywiththeregulations,

eitherinfullorinpart.Thiswilldamagethecredibilityofthereforms,andleavemillionsofindividuals

stillwithoutadequatepensionsavings.93%ofUKbusinesseshavelessthan20staff.Theirowner

managersarenotemploymentlaworpensionsexpertsand,formany,hiringandmanagingstaffis

atime-consumingbutnecessarytask,notabusinessfocus.Forthoseemployers,thesereformswill

bebewildering.

Westillhaveafewyearsbeforethesesmallerfirmsaresubjecttotheirnewduties.Thisgives

timefortheActtobecleanedupandthesmallerregulatoryandadministrativeburdensremoved

ormodified.Businesscanunderstandwhytheynowneedtopaya3%pensioncontribution,but

employerswillnotbesounderstandingwhenthecostofthatcontributiontothebusinessisdwarfedby

administrativecosts.



Lawrence Churchill (Chairman, NEST Corporation)Forthoseofusinthepensionsindustryit’seasytomakeassumptionsabouttheknowledgeoftypical

definedcontributionschememembers.

Butbehaviouralresearchhasdemonstratedthatsomeoftheseassumptionsareopentoquestion.

In2006,astudyofWhartonMBAandHarvardcollegestudents’decisionmakinginmutualfund

investingwasconducted.

Theauthorspresentedtheirtestsubjectswithfourmutualfundsthatwereallsubstantiallysimilar:

trackingtheS&P500.Theywereaskedtochooseafundinwhichtoinvest$10,000,followingreceipt

ofstandardinvestmentinformation,forexample,fundprospectuses.Inthecontrolgroupwithoutfee

information,95%oftestsubjectsfailedtominimisefeeswhenpickingfunds,feesweretheonlyreal

differentiatorbetweenthefunds.Inthegroupwithfeeinformation,85%didnotminimisefees.

Bearinmindthatthisgroupwereinthetop2%ofstudentperformersinthecountryandthereforemuch

morecapablethanthepopulationasawhole.

Soevenpeoplewithanelitebusinessbackgroundmanymakeelementarymistakesininvestmentfund

selection.Infact,thereissomeevidencetosuggestthatlowerincomeandlessereducatedgroups,

whilenotnecessarilyinvestmentsavvy,areactuallyverycompetentatmanagingtheirmoney,inthe

formofdailyandweeklybudgets,purelyandsimplybecausetheyhavetobe.Theyliterallycan’tafford

notbeontopoftheircosts.

Behaviouralbiasesaffecteveryonetosomeextent.TheeconomistHarryMarkowitzonceexplainedhow

hepickedhisUSAuniversitypensionfundsportfolio:

Ishouldhavecomputedthehistoricalcovarianceanddrawnanefficientfrontier,insteadI

visualisedmygriefifthestockmarketwentwayupifIwasn’tinit–orifitwentwaydownand

Iwascompletelyinit.Myintentionwastominimisemyfutureregret,sosplitmy[retirementpot]

50/50betweenbondsandequities.

Markowitzexhibitsacoupleofthingstonote:

• Naivediversification–assetallocationbasedonrulesofthumbthatleadstolessthan

optimalresults.

• Regretbias–takingadecisionsoastoavoidfutureregret.

Theintroductionofautomaticenrolmentmeansthattherewillbealargeinfluxofnewpensionsavers

withdifferentfeaturestotraditionalinvestors.

Thetargetgroupisstrikinglydifferenttothepopulationcurrentlysavingintoapension.Whilemedian

earningsinthetargetgrouparearound£20,000medianearningsofthosecontributingtoapensionare

around£30,000.

ThismeansNationalEmploymentSavingsTrust(NEST)futuremembersarelikelytohavelessfamiliarity

withfinancialproductsthanexistingsavers.Thosewithpensionscurrentlyaremorelikelytohavehigher

levelsofsavingsandtoworkinmanagerialorprofessionaljobs.


Theyarealsolikelytohaveahigherlevelofeducation.Theyarealsolikelytobeolder.Assuch,the

averageriskcapacityofthetargetgroupisconsiderablylowerthanthatofthosecurrentlysavinginto

apension.

Ourresearchshowsthatonbalanceourtargetgroupismoreriskaversethanriskseekingwithalarge

proportion(37%)ofthetargetgroupfavouringtakingnoriskwhatsoeverwithretirementsavings.Risk

preferencesalsotrendbyincomewiththoseonlowerincomesbeingmorelikelytoberiskaversethan

thoseonhigherincomes.Ourresearchalsoshowedthatyoungerpeoplehavesomeofthestrongest

reactionstoinvestmentloss.

Theresearchshowedthatthetargetgrouparelikelytohavenegativeandemotionalresponsesto

investmentloss.Theresearchobserved:disappointment,anger,surpriseandincredulitywhenresearch

participantswereconfrontedwithhypotheticalinvestmentlosses.Losswasalsofeltwithasenseof

immediacyandwasnotconsideredwithinthecontextofalong-termsavingsvehicle.Lossaversion

wasobservedmoststronglyamongtheyoung(whowereoftenthemostriskseeking)andthoseon

lowincomes.

Whenwelookatdesigningadefaultapproachforourmembers,therearethreeareasofriskintension

witheachother–therisksthatpeoplewanttotake(theirriskappetite),theriskspeoplecantake

(theirriskcapacity)andtheriskspeopleneedtotaketodeliveraretirementincome.Thechallengefor

developingtheinvestmentapproachhasbeentobalancethesethreefactors.

Ourapproachmaylookabitdifferentfromthattakenbymanyworkplaceschemesbecausethepeople

thatNESTisdesignedforarenotthetypicaltargetmarketforpensions.

Weneedtomanageourmembers’exposuretorisktoencouragethemtosaveregularlyandbuildup

retirementsavingsovertheirworkinglife.Thekeyaimistogetpeoplesavingandkeepthemsaving–

ourapproachisdesignedtoencouragethat.

Youcanreadmoreaboutareexistingresearchandhowwedevelopedourapproachat

www.nestpensions.org.uk



Steven Cameron (Head of Regulatory Strategy, AEGON)

The challenges

Tomostpeople,deferringconsumptiondoesn’tcomenaturally,particularlywhendisposableincome

isbeingsqueezed.Thismeansrightnow,identifyinganddeliveringeffectiveincentivestosaveis

particularlyimportant.TheCoalitionGovernmenthasintroducedarangeofnewpolicyinitiativesinthis

field,aswellasadvancingmany,suchaspensionsreform,putintrainbythepreviousGovernment.

Butwillthese–eitherindividuallyorcollectively–deliverabreakthroughacrosstheUKinsaving

forretirement?

Toseektoaddressthisquestion,AEGONrecentlycommissionedindependentresearch42intoconsumer

attitudestosaving.Researchinthisfield,particularlydirectwithcustomersregardinghowtheymight

behave,issurprisinglylight.Wewantedtoassessifcurrentincentivesareworkingandtogaininsight

intohowconsumersmight‘behave’facedwithpossiblechangestosavingsincentives,includingtax

breaks,removalofcompulsoryannuitisationandhigherstatepensions.

Weconcludedthatthecurrentsystemofsavingsincentiveshasmanypositivebasicdesignelements,

andthatitcaninfluencebehaviour.Butatthesametime,it’sclearthatthesystemsuffersfromseveral

importantlimitations.

Manyconsumersjustaren’tawareofwhat’sonoffer.Few,forexample,reallyunderstoodtheconceptof

‘taxrelief’butwereattractedtotheconceptofgetting‘top-up’moneyfromGovernment.

Lackofawarenessispartly(butnotentirely)fuelledbythesheercomplexityofthecurrentsystem,

includingtheinteractionbetweenprivatepensionsavingandentitlementtostatebenefits.Butdespite

whatindustrycommentatorsoftenclaim,wefoundthepotentialtoloseoutonmeanstestedbenefits

wasn’tdisincentivisingsavings–becausenoneofthoseweresearchedhadanyawarenessofthis.

Similarly,whileremovingcompulsoryannuitisationwasviewedpositivelybyourconsumers,most

hadn’tbeenawareofthecompulsioninthefirstplace.

There’salsoamajorissuewithlackoftrust–notjustwithfinancialservicesprovidersbutinGovernment

tomaintaincurrentarrangementsandincentives.

Alltheseclearlyhampertheeffectivenessofthecurrentsystem.EconomicmodellingthePensionsPolicy

Institutecarriedoutforusdemonstratedthatevenafterauto-enrolment(whichAEGONsupports)and

othercurrentreforms,mostindividualslookssettoendupwellbelowtheretirementincomelevelsput

forwardbyLordTurnerandothersasadequate.

Afurtherissueisthatindividualsseemmuchmoreattractedtoproperty(inadditiontoafirsthome)asa

meansoflong-termsavings.

42 Towardsmoreeffectivesavingsincentives



Basedonourresearch,AEGONhasidentifiedarangeofpossiblesolutionstomakingsavingsincentives

moreeffective.

Onerelativelysimplesolutionisforourindustrytochangethewayitdescribespensionstaxrelief.

Thoseweresearchedrespondedfarmorepositivelywhenthiswaspresentedas‘matching’,ora

freecontributionfromtheGovernmenttotop-uptheirsavings.Thisisoneexampleofhowclearer

communicationcanpaydividends.Takingthiswider,webelievethereishugescopetosimplifythe

disclosurematerialcurrentlyprescribedwithinregulationtomakeitmoreempoweringtocustomers.

Anotherkeyfindingwasthemajorinfluenceemployershaveonemployeesavingsbehaviour.The

availabilityofanemployercontributionwascitedasacommontriggertogetpeoplestartingsaving.

IndustryandGovernmentshouldfocusevenmoreonencouragingemployerstosupportpensionsand

maintainvaluableemployercontributions–particularlyaswebegintophaseinpensionsreform.Agood

outcomewouldbealoweroptoutrateonceautomaticenrolmentcommences.Anevenbetteronewould

beforcontributionsfromemployersandemployeestoremainabovethestatutory8%minimum.

Toimproveawarenessandunderstanding,we’dverymuchsupportamasseducationandawareness

campaignoftheadvantages(includingtaxincentives)ofdifferentsavingsproducts.Themoneyadvice

service(formerlyCFEB)couldplayakeyrolehere.

Withinthis,webelievethereneedstobeaspecificfocusonthecosts,benefitsandrisksofproperty

asinvestmentcomparedtootherassetclasses.Thisshouldalsocoverthebenefitsofdiversification

betweenassetclassesandconsiderationsaroundturningcertainassetsintoanincomestream

inretirement.

WhilemanyofthenewinitiativestheGovernmentisproposinghaveclearattractions,wehaveconcerns

thatinitiativeoverloadcaninitself,discourageengagementwithsavings.Frequentchangemakesit

harderforconsumerstobuildandmaintainawarenessandunderstanding.Anditfuelsmistrustwhen

whatpeoplereallywantistohavetrustinastable,reliablesavingsenvironment.

Finally,we’dstronglyencouragepolicymakerstoinvesttimeinresearchinglikelyconsumer(andindeed

employer)behaviour.Wemaywellfindthatthekeytoencouraginggreatersavingsisn’tintroducingstill

morepolicychange–itmightbehelpingconsumerengagebetterwiththecurrentsystem.



Phil Hickley (Senior Public Affairs Manager, AXA UK)

The big challenges

Anumberoffactorsareinplacethatstoppeoplesavingadequatesumsfortheirretirement–many

oftheminteracttoprovideacomplexsetofcircumstancesthatholdpeopleback.Amongthemost

importantwillinclude:affordability,andtheabilityoftoday’sworkforcetosetasideameaningful

contributionfromtheirearningstoprovideanincomeinretirement.InthecoalitionGovernment’s

attemptstodealwiththefiscaldebtthemajorityofpeoplenowhavealowerdisposableincomethan

theydidafewyearsagoandfurthersqueezesareontheway–forexamplemanypeoplewon’tfeelthe

impactofhighernationalinsurancecontributionsorthechangestotaxationandtaxcreditsforalittle

whileyetandsomearestillcomingtotermswithrecentwagefreezes.Higherinflation,andtheimpact

thishasonlivingstandards,alongsidetheneedforanincreasingnumberofouryoungerpopulationto

servicestudentdebtalsoplaytheirpart.

Inclination to saveencapsulatesalltheotherpressuresthatpeopleoftenfeelunder.Evenwhen

theyhavetheavailablefundswithwhichtomakeprovisionfortheiroldage,thebenefitsofinstant

gratificationversuscomfortinoldagewilloftenmeanthatmanyfolkwillhappilytradeuptothenext

electronicgadgetratherthansquirrelmoneyawayforthefuture.Fromsomeearlierresearchwehave

undertakenweknowthattherearemanypeopleonaverageandaboveaverageearningsthatcan’tbring

themselvestojoinadecentemployer’spensionschemebecausethey’llbegivingawaysomeoftheir

hard-earnedwagesnow.

Anotherfeaturethatcurrentlydeterswould-becontributorsfromeitherstartingorincreasingtheir

pensioncontributionstoamoremeaningfullevelisthecomplexityofthecurrentsystemandhowstate

provisioninteractswithpersonalprovision.Whileclearlysuccessfulinbringinganumberofpensioners

outofpoverty,meanstestedbenefitshavealottoanswerforinpreventinganumberoflowertoaverage

earnersbeinggivensufficientencouragementtomakeastartinsavingforapension.Indeed,anyreader

whohappenstoperusethepersonalfinancepagesinanynumberofnewspapersandmagazinesjustto

lookforclarityandguidanceabouttheirownpositioncouldbeforgivenbybeingcompletelybaffledby

whattheyread.

Finally,theprospectofarapidly changing environmentforjobs,lifestyles,leisuretime,familystructure

(withmoreandmorepeoplefacingtheprospectofhelpingtolookafternotjustthemselvesbuttheir

parentsandchildrentoo)willallcontributetopeoples’uncertaintyaroundtheneedtocontributetoa

pension.Manypeoplewillcontinuetochancetheirarmbelievingthattheirinheritedwealth–mostlyin

theformofpropertyownership–coupledwithcontinualGovernmenttinkeringwiththesystemwillbe

enoughto‘getthemby’.

Clearlyformostthiswillbeamisguidedapproach.


Knowledgethatthesavingsgaphasbeeninplaceformanyyearswillleadtoaconclusionthatany

numberofattemptstocloseitandencouragegreatersavingforacomfortableretirementhavealready

beentried;mosthavefailed.The‘reward’structureintheformoftaxreliefisinplaceandwhilewe

mightdebatecomplexityandsimplicity,fewcanarguethattaxreliefinitselfisofinsufficientvalueto

encouragepeoplefrommakingprovisioniftheyhavetheinclinationtodoso.


Overmanyyearstraditionaloccupationalpensionsintheformoffinalsalaryordefinedbenefitschemes

havebeenindeclineforanynumberofreasons.Throughoutthisdecline,however,wehaveretained

anddevelopedoptionsallowingmoremoderncompanyschemes–setuponamoneypurchasebasis–

throughtogrouppersonalschemes,SIPPsandrightdowntoindividualpersonalpensions.Alongside

numerousinvestmentpossibilitiestheinfrastructureisinplacetoabletosupportgrowthinpension

provision,yetinthemainitisnothappeningsowhatmorecanbedone?

ThecoalitionGovernmenthasmadeausefulstartinratifyingearlierattemptstogetpeopleinto

workplaceschemesfrom2012withthelaunchofNESTandautoenrolmentiscertainlytherightpolicy

approachtogettingthesavingshabitkick-started.Whatwe’llneedtoavoidthoughistheideathata

combined8%contributiononasegmentofearningswillprovideanythinglikethelevelneededtosecure

acomprehensivepensioninretirementtomatchmostpeoples’aspirations.

Educationmustfeaturestronglyinhowwemightclosethesavingsgap.Rightnowouryoungpeopleare

notsufficientlypreparedonleavingtheeducationsystemtobeabletounderstandandmanagetheir

financialaffairseffectivelyorwithanyconfidence.Longbeforetheycontemplatestartingapension

they’relikelytoneedtomakefundamentaldecisionsaroundsomeofthebasicslikecontributing

toafamilybudget,payingoffastudentdebt,housingcostsandsavingfornecessitieswellbefore

theyconsidersavingforsomeluxuriesandtheyaresimplynotequippedtobeabletodoso.Better

financialeducationmustbethewayforwardfromtheclassroomthroughfurthereducationandinto

theworkplace.

Whileithasbeenmanyyearsinthemakingwearestartingtobuildthefabricofafinancialeducation

serviceforouradultpopulationalthoughIdon’tproposeinthisshortarticletodebateitsmeritsand

howitmightbeimprovedfurthertosecurebetterfinancialprospectsforpeopleatlarge.

Wherewearemissingatrickisbylargelyignoringtheeducationsystemandtheroleitcanhavein

equippingthefuturegenerationwiththebasictoolsthatwillenablethemtomakeinformedjudgements

abouttheirfinancesthatwillleadtoaclosingofthesavingsgapmorenaturallyandwithoutfurther

tinkeringbetweencarrotandstick.



Dr Ros Altmann (Director General, Saga Group)

The challenges

TheinadequaciesofUKretirementsavingshavebeenwell-documented.Estimatesofthe‘SavingsGap’

runintomanybillionsofpounds.Itisclearthatpeoplehavegenerallylostconfidenceinpensionsand,

inmanycases,theysimplydonotwanttoengage.Evenwhenthereisanemployercontributiononoffer,

workersoftenstilldeclinethechancetojoincompanypensionschemes.

Thisleavesmillionsofpeopleatriskofanimpoverishedoldage,tryingtosurviveonjustastate

pensionandperhapsmeans-testedtop-upsinlaterlife.Inordertoovercomethechallengesofpensions

inadequacy,itisimportanttorecognisewhatthebarrierstopensionsavingreallyare.

Firstly,thestatepensionsystemitselfunderminesprivatepensionsaving.Asnearlyhalfofpensioners

endupentitledtomeans-testedPensionCreditwhentheyretire,pensionscouldbeanunsuitable

investmentforsignificantnumbersofworkers,especiallythoseonmoderateincomeswhocannotbe

suretheywillnotbemeans-testedinretirement.PensionCreditwilltakeawaymuchorallofanyprivate

pensionincome,somanypeoplewillbebetteroffsavinginanISA,ratherthanapension.

Secondly,manypeoplehavesomuchdebt,orsuchinadequateincomesrelativetothelifestylethey

wanttoachievenow,thattheyfeeltheyjustcannotaffordtoputmoneyintoapension.

Thirdly,incentivesforpensionsaving,otherthanfortop-ratetaxpayers,donotseemthatattractive.

Manyyoungerpeople,whomayenduponhigherratetaxinfuture,particularlythoseindebt,who

donotalreadyownahome,couldfindthattheywillbebetteroffnotcontributingtoapensionatthe

moment.Betterandclearerincentivesareneeded.

Fourthly,thelevelofhousepriceshasbeenaproblemforpensionsaving,withmanyyoungerpeople

findinghousingsoexpensiveandhavingtotakeonsomuchmortgagedebt,thattheycannotaffordto

putmoneyintoapensionaswell.

Fifthly,thenatureofthepensionsvehicleitselfisaproblem.Pensionsare-a‘lockedbox’–thisis

bothastrengthandaweakness.Ofcourse,thefactthatpeoplecannotaccesstheirmoneyuntillater

lifehastheadvantagethattheycannotspenditbeforeretirementanditshouldbethereinfutureto

helpsupporttheiroldage.However,thedisadvantageisthatformanyyoungpeoplecontributingtoa

pensionfeelslikehavingtheirhard-earnedmoney‘confiscated’fromthemandputintoaninvestment

whichchargesfeeseachyear,mayormaynotdowellandeveniftheydesperatelyneedthemoney,they

cannotgetitback.Thisputsthemoffcontributinginthefirstplace.

Finally,withsuchhighlevelsofdebtamongallagegroups,itisnotclearthatpensionsavingshould

betheirfirstpriority,butiftheydonotstartsavingearlyandgettingintothathabit,thereisariskthey

neverwill.Allthesefactors,alongwithsuccessivescandalsovertheyearsandthecomplexityofthe

wholesystem,haveledtoinadequateretirementsavingsintheUK.


Rename private pensions: Pensionsreallyneedan‘imagemakeover’,inordertohelppeoplefeelmore

positivetowardstheidea.Theword‘pension’oftenhasnegativeconnotationsnowadays.Itconjuresup

theimageofbeingold,whichmanypeopleresistandmyfirstsuggestedsolutionistorenameprivate

pensions.Weshouldabolishtheword‘pension’foranythingotherthanwhatthestatepayspeoplein

theiroldage.


Radically redesign state pensions:AstheGovernmentisproposingtoradicallyreformthestate

pension,payingadecentflat-rateminimumof£140aweekintoday’smoney,futuregenerationswill

eventuallybeabletounderstandthatthereisonlyacertainamounttheywillgetfromthestate.Therest

isuptothemandiftheywantmore,theywillhavetodosomesaving.Wecanthencomeupwithmore

creativesavingsvehiclesthatwillbecalledsomethingotherthan‘pensions’.

Design more flexible products – for lifetime savings: Theindustrycoulddesignmoreflexibleproducts,

for‘lifetimesavings’whichwillhelppeoplesavefortheiroldagebuthavesomeaccesstotheirmoneyif

theyreallyneedit.Thiswouldhelppeoplecontributeorputinmoreinthefirstplace.

Lottery:Iwouldliketoseealotteryattachedtotheselong-termsavingstoo,sothatanyoneputting

moneyinwouldbeenteredforaprizeof,say,£1million,eachmonth.Thattapsintothepsycheofmany

peoplewhoprobablywanttofeelthattheremaybesomethinginitforthemtoday,notjustinsomevery

distantfuture.

Moreuseofinsurance:Thereisclearlyinsufficientattentionbeingpaidtotheneedtoinsureagainst

verybadoutcomesinlaterlife.Whetheritisinsuranceagainstillnessesthatcurtailearningsor

insuranceagainsttheneedforexpensivelong-termcare,itwouldmakesensetotieinpensionprovision

withaninsuranceoverlay.

Inconclusion,thereisanurgentneedtorethinkpensionsandbothGovernmentandthefinancial

industryhavecrucialrolestoplayinhelpingindividualsprepareforabetterretirement.Pensionsalone,

however,willnotsolvealltheproblemsfacedbyourageingpopulationanditwillbeessentialtohelp

peopleplantoworklonger–preferablypart-timeforanumberofyears–aswell.



Ronnie Morgan ACII, DipPFS and Robin Nimmo (Strategic Insight Managers, Scottish Life)

The challenges

Muchhasbeenwrittenonthesubjectofthesavingsgapandmanyreasonsforithavebeenputforward:

• Poorperceptionofpensionsandofthesavingsindustry

• Complexproducts

• Longevityimprovements,leadingtoreducedannuityrates

• Interactionofsavingsandmeans-testedbenefits

• Fearoflockingmoneyawayforthelong-term

• Taxincentivesbeingskewedtowardsthewealthy

Whileeachoftheseplaysapart,thecruxofthemattercouldbesimpler:asanation,wedon’twantto,

orfeelwehaveto,saveforourretirement.Oratleastwedon’twanttosaveatthelevelrequired.

What reasons are there for this?

• Agenerationinwhichmanybelievethestatewillprovide;thatit’stheirrightundertheWelfare

State.Peoplewereledtobelievethatthestatewouldlookafterthemfrom“cradletograve”.

Withthismindset,howlikelywouldtheybetoteachtheirchildrenaboutthenecessitytosave

forretirement?

• Aviewthatyouremployerwouldlookafteryou,particularlyifyouworkedinthepublicsector.

• Agenerationofconsumers–savingsrateshavefallenandlevelsofpersonaldebthaverisen.Itcould

becomemoresociallydesirabletospendthantosave,fuelledbyskilledproductmarketingandeasy

availabilityofcredit.

Duetoanumberoffactors–principallychangingdemographics,longevityandchangingemployer/

employeerelations–neitherthestatenoremployerswillbeprovidingasmuchtowardretirementaswas

previouslythecase.Thismeanseveryonewillhavetoeitherworklonger,orsavemorewhileworking,or

acombinationofthese.

Thegovernmenthasalreadydecidedthattheagefromwhichthestatepensionispaidwillbeincreased.

Buttheotherpartoftheequationisdowntoindividualsandemployers.Peoplemustsavefortheir

retirementatanappropriatelevel.

Tohelpmakethishappenthereareafewkeycomponents:

1. Getcrystalclearabouttherealityofthesituation.Ifwedon’tsaveforretirement,lifemaybe

veryhard.

2. Showclearlyhowmuchshouldbesavedtogetareasonableoutcome.

3. Reinvigoratethesavingsculture;makepeoplefeelgoodaboutsavingfortheirretirementandshow

thatexcessivespendinganddebtareunacceptable.

Financialeducationmustbeattheheartofthis.

Weneedtomakesurefuturegenerationshaveagoodgraspoffinancialmatters.Thiscanbeachieved

throughthenationalcurriculumandalsobymeansofvoluntarygroups.Financialbusinesseshavean

importantroleinthis,tohelpensureasavingsculturetakeshold.


Forthosewhoareheadingtowardsretirement,wemustalsomakefinancialeducationandassistance

available,otherwisewemayhavealostgeneration;peoplewhobelievedtheydidnotneedtosavefor

retirement,butweresadlymistaken.

AsforgenerationX,canwemakeani-SAasdesirableasani-Pod?


TheUKhasanestimatedsavingsgapof£27bnaccordingtotheAssociationofBritishInsurers.Butwhat

arethepossiblesolutionsforreducingthisgap?Putbluntly,ifIndividualswanttoavoidalowincomein

retirement,theywillneedtosavemoreorworklonger.

Mostindividualsarenotawareofhowmuchtheyneedtosave,ortheythinktheStatewilllookafter

themintheirretirement.Suchperceptionsneedtochange.Individualsneedtobeinformed,inclearand

simpleterms,whattheyarelikelytogetfromtheState.Andtheyneedtobeeducatedontheneedto

save,howtosaveandwheretheycangethelporadviceonsavingforretirement.Suchmessagescould

bedeliveredthroughtheworkplaceaspartofautomaticenrolment.

Asimplifiedadviceprocessisneededtoincreasetakeupratesforsavingsproducts.Someindividuals

arenotwillingtopayforadvice,yettheyneedhelpinchoosingsuitableproducts.Amethodof

streamliningthecurrentadviceprocessisneeded,keepingcoststoaminimumwhilestillproviding

appropriaterecommendations.

Manyindividualsdonotwanttosaveinpensionproductsbecausetheydon’twanttolockmoneyaway

untiltheirretirement.Aproductthatcombinesthebestelementsofapensionwiththeaccessibility

of,say,anIndividualSavingsAccount(ISA)couldhelpreducethesavingsgap.Individualscouldthen

savefortheirretirementinconfidence,knowingthattheycanaccesssomeoftheirsavingsincertain

circumstances,forexampletobuytheirfirsthomeorincaseoffinancialhardship.

TheGovernmentprovidesgeneroustaxconcessionsonpensionandISAproducts,yetthesebenefits

areseldomfullyunderstoodorappreciatedbyindividuals.Howmanypeopleunderstandtaxreliefon

pensioncontributions?Asimplermethodofincentivisingindividualstosavemayhavegreaterimpact.A

Governmentmatchedpaymentsystemcouldbeonepossibleway.Foreach£1anindividualcontributes

totheirpensionplan,theGovernmentcouldpayin£1uptoacertainoveralllimit.Suchstructuresare

simpleforpeopletounderstandandmanywillalreadybefamiliarwiththemfromtheiremployer’s

pensionscheme.

Automaticenrolmentisbeingintroducedfrom2012.Thiswillgosomewaytowardshelpingtoreduce

thesavingsgap.Butit’sunlikelytoprovideindividualswithanadequateincomeinretirement,

especiallyifcontributionsaresetatneartotheminimumlevels.Individualswillneedtomakeadditional

savingsthroughtheschemeorbyothermeans.

Thesesuggestionscouldallhelptoreducethesavingsgap;butcompulsionmaybetheonlywayof

eliminatingitcompletely.Automaticenrolmentisagoodstart.Individualscouldbecompelledtosave

throughremovaloftheopt-outwhileminimumcontributionlevelscouldbeincreasedfromthecurrent

lowlevelsoveraperiodoftime.Thedownsidewithcompulsionisthatitislikelytobeviewedbymany

individualsandemployersasanadditionaltax,somethingwhichisunlikelytobewelcomed.



David Nish (Chief Executive, Standard Life)Theneedtoimprovelong-termsavingsintheUKisoneofthemostimportantissuesfacingsociety.One

infiveBritonslivingtodaycanexpecttoseetheir100thbirthdayandretirementsnowcommonlyextend

acrossthreetofourdecades.Whilstthisistobecelebrated,itmeanspeoplewillneedtosavemoreif

theyaretoenjoyfinancialsecurityinlaterlife.

Atpresent,toomanypeoplearefailingtosavesufficientlyorarenotsavingatall.StandardLife’slatest

researchwiththeLifeAcademycharityshowsthatonly51%ofadultsareactivelyinvestingintheir

financialfuture.

Solvingthisproblemwillnotbeeasy;thereisnoquickfix.Aprogrammeofsustainablechangeis

requiredoverthecourseof10to20yearsandtheindustrywillneedtoworkwithpolicymakersand

otherstakeholdersasneverbeforetoachievetherequiredoutcome.

Thispartnershipapproachisalreadybeginningtotakeshape.Awelcomepoliticalconsensusis

emergingaroundtheneedtoincreaselevelsoflong-termsavingandthereformsnecessarytodeliver

it.TheproposeduniversalStatepensionwillsimplifysavingandprovideastrongfoundationonwhich

individualscanbuildprivateprovision.Furthermore,thelaunchofautomaticenrolmentandNESTin

2012willplayasignificantrole.Itwillbringmillionsofindividualsintolong-termsavingsandformthe

basisofaninclusiveandsustainableworkplacepensionssystem.

Sofar,sogood.Butweneedtogofurthertodeliverthefundamental,long-termrebalancingofthe

economytowardssavingthatissovitaltothecountry’sfuturewell-being.Inparticular,weneedtodo

threekeythings:

• Makesavingmoreattractiveandmoreengagingbyfocusingoncustomers’needs;

• Increaselevelsoffinancialcapabilityandinclusion;and

• Increaseconsumers’trustinlong-termsavingandthefinancialsector.

Asanindustry,weneedtodesignproductstosuitconsumers.Forexample,workingwithpolicymakers,

weshouldexplorewaystobringISAs–anextremelypopularformofsaving–andpensionscloser

together.Thiswouldhelptocreateasimplerandmoreflexibleapproachtolong-termsavings.

Butitisnotenoughsimplytoprovideconsumer-focusedproducts.Ifpeoplearetousetheseproducts

weneedtoincreaselevelsoffinancialengagementandinclusion.Thiswillrequireasustained

investmentinfinancialcapabilityacrosssocietytoequippeoplewiththeskillstomakesound

financialdecisions.

Simplifyingsavingandimprovingfinancialcapabilityshouldhelptobolsterconsumerconfidenceinthe

industry.Buttosecuregreaterlevelsoftrust,theindustrymustbecomemoretransparentanddeliver

betteroutcomesforcustomers.That’swhyStandardLifesupportstheRetailDistributionReview,which

willprovideindividualswithgreaterclarityandcontroloverthecostofadvice.

Byworkingcloselywithpolicymarkerstheindustryhasauniqueopportunitytotransformthesavings

landscapeanddeliverrealbenefitsforsocietyasawhole.Forthesakeofthisandfuturegenerationswe

mustseizeit.


Professor Phillip Booth (Editorial and Programme Director, Institute of Economic Affairs)

The big challenges

Thestatehasmoreorlesstakenovertheroleofprovidingincomeinoldageforthemajorityofthe

population.Thoseinthebottom60%oftheincomedistributionreceivemostoftheirincomeinoldage

fromthegovernmentinoneformoranother.Fewofthemhaveanyincentivetosupplementtheirincome

bysaving.

Weneedclearerthinkingabouttherelativeadvantagesofstateandprivateretirementprovision.There

arecontinualcomplaintsthatprivatesavingcanneverbesufficientforretirementbecauseannuity

ratesaresopoor.Also,definedbenefitschemesareclosingdownbecausethecostsoffundingdecent

provisionarerising.Instead,peoplesuggest,weshouldhavemorestateprovision–especiallyfor

peopleonlowincomes.

Unfortunately,therisksdonotgoawaywhenthestateprovidespensions–theyarehiddenandoften

becomesystemic.IfweaddpensionsandhealthobligationstoBritain’sfuturenationaldebtthenthe

totaldebtburdenwearepassingtothenextgenerationcomestoabout500%ofnationalincome.This

isaveryrealburdenthatarisesfromthisgenerationmakingpromisestoitselfwithoutputtingasidethe

meanstomeetthosepromisesthroughsaving.

Thefactisthat,ifwewishtoberetiredfor20yearsormoreandworkforonly40years,wehavetomake

bigsacrificesduringourworkinglifetopayforourretirement.Lowannuitiesfromprivatesavingare

simplyanindicatorofthebasiceconomicfactsoflife.

Ofcourse,itistruethatprivatesavingforretirementleadstorisksarisingfromlowinvestmentreturns

andincreasinglongevity.Thoseriskscanbemanaged,however.Iflifeexpectancyatretirement

increasesandannuitypricesrise,thenindividualsfaceexactlytherightincentivestoworkforlonger,

workpart-timepastretirementageandsavemoreintheyearsbeforeretirement.Thismaynotbeideal,

butthesituationiscontrollableandtheincentivesrunintherightdirection.Ontheotherhand,whenthe

stateprovidesuswithourretirementincomesriskscanbesystemicandself-reinforcing.Forexample,if

longevityincreases,therewillbemorepensionersandtheymaythenusetheirvotingpowertoincrease,

ratherthandecrease,pensions.Thetaxesthatarenecessarytofinancethehigherpensionbillwill

discourageandnotencouragetheworkandenterprisenecessarytofinancehigherlivingstandardsin

oldage.Furthermore,statepensionsystemsrelyontheworkingpopulationnotshrinkingrelativetothe

retiredpopulationandyetthereareabsolutelynoincentiveswithinstatepensionsystemstoensurethe

populationstabilitythatisneeded.

So,inshort,weneedtoreturntothedebatewewerehavingtwodecadesagoandmovetomoreprivate

pensionprovision.Stateprovisiondoesnotreducethecostsortherisk–itmerelybrushesthemunder

thecarpet.




InFebruarytheInstituteofEconomicAffairspublishedapaperwhich,amongstotherthings,made

proposalsforlong-termreformsofthepensionsystem43.PensionsMinisterStephenWebbisonpublic

recordashavingdescribedtheshort-termproposalsinthepaperas“loathsome”.Fortunately,the

Treasuryseemstohaveamorereceptiveviewofthelonger-termproposalsdiscussedinthatpaper:

indeed,threeoutoffourofthemwerementionedinthebudgetasprovidingthebasisforreform.

Theviewexpressedinthatpaperisthatthestatepensionsystemshouldbereformedalongthe

followinglines:

• TheBasicStatePensionandthesecondstatepensionshouldbemergedintoonepension.

• Thecontributoryprincipleshouldbemaintained.

• Pensionageshouldbechangedsothatlifeexpectationatretirementremainsconstantandthis

processshouldbede-politicised.

• Peopleshouldbeabletocontractoutofthisgovernmentschemewithanactuariallyfairrebateto

investinapersonalscheme.

Thecurrentarrangementwithtwoseparatestatepensionswithdifferentuprating,qualificationand

indexingrulesisbizarreandmustbeadisincentivetosaveduetothecomplexityanduncertaintythe

systemscreate.Thecontributoryprincipleshouldbereinforcedbecauseitenablespeopletounderstand

theirstatepensionentitlementasitaccrues–theycanthereforemakerationalsavingsdecisions.Fixing

lifeexpectationatretirementwillconsiderablyde-riskthestatepensionsystemandallowpeopletosave

innovelways,withagreaterdegreeofcertainty.Forexample,theycouldsaveforabridgingincome

betweentheirdesiredretirementageandstatepensionage.

Ifwetakethesethreereformstogether,costswouldbereducedsufficientlytoallowastatepension

tobepaidatalevelatwhichmeanstestingwouldbeminimal.Incentivestosavewouldthereforebe

restoredrightacrosstheearningsspectrum.Ofcourse,allowingpeopletocontractoutofthestate

systemautomaticallyprovidesastrongincentivetosave.

Unfortunately,thoughthegovernmenthasindicatedthatitwillfollowthefirstthreeprinciplesof

reform,itlooksasifcontractingoutwillbeabolishedandnotextended.Insteadofallowingpeopleto

contractoutofpartofthestatepensionthegovernmentwill,instead,provideahigherstatepensionfor

everybody.Thecontracted-outrebateswhicharecurrentlysavedinprivateschemeswillbespentbythe

governmentwipingoutupto£8bnofsavingatastroke.Thisisnotthewaytogo.Instead,theprinciple

ofcontractingoutofthestatepensionschemeshouldbeextendedtoalloweverybodytosaveprivately

fortheirfuturepensionincome.

43 BoothP.M.(2010),Sharing the Burden: how the older generation should suffer its share of the cuts,DiscussionPaperNo.34,InstituteofEconomicAffairs,London.


Chris Curry (Research Director, Pensions Policy Institute)ThelandscapeforretirementsavingintheUKhasbeenchangingfastsincetheelectionoftheCoalition

GovernmentinMay2010.Andthatprovidesperhapsthefirstbigchallengeinthecomingyears.

Retirementsaversarehavingtotryandaccountforchangesinthetaxationofpensions,theoptions

surroundingtakingpensionincome,changesintheadviceregime,changesinStatePensionAges,and

changesinpublicsectorpensions,nottomentionpossiblefurtherchangessurroundingthewhole

structureofthestatepensionsystemandearlyaccesstoprivatepensionsaving.

Thisstateoffluxinthepolicyenvironmentwillhaverealworldimpactsonsavers,insomecases

increasingoptionsandflexibility,butalsoincreasingtheneedforhelpandadvice.Untiltheretirement

savingsframeworkreachessomethingapproachingstability,itisgoingtobedifficultforpeopletowork

outwhattheyoughttobedoing.

Ofcourse,auto-enrolmentwillhelptoovercomesomeofthebarrierstodecisionmaking,withinertia

meaningthatunlesspeopleactivelychoosenotto,manyofthemwillbepensionsavingbydefault.

TheGovernmentestimatesthatthiscouldincreasethenumberofpeoplesavinginapensionbyupto

8million–averywelcomeincrease.Butthisgivesrisetoasecondbigchallenge–ensuringthatauto-

enrolmentworkswellgiventheeconomicenvironmentinwhichitisbeingintroduced.Whentheideaof

auto-enrolmentwasfirstproposedin2005,individualsmaynothavenoticedormindedthereduction

intake-homepayinthemonthsafterauto-enrolment.However,inthecurrenteconomicbackgroundof

stagnatingpay,higherinflationandlessjobsecurity,morepeoplethanpreviouslyexpectedcouldopt-

outofpensionsavingastheyworkhardtomanagetheirmoney,ormightprefertosaveforarainyday

inthenearfutureratherthaninretirement.Itwillbeimportanttoensurethatauto-enrolmentworksas

wellasitcan,toavoiddilutingtheundoubtedbenefits.

Opt-outratescouldbefurtherincreasedifreturnsonpensionsavingfundsinthefirstfewyearsafter

auto-enrolmentarenothigh,andpeopledonotseegainsintheirembryonicpensionfunds.Andthis

leadsontothenextbigchallenge:thepeoplemostlikelytoneedhelpunderstandingthebenefits

andvaluesoflong-termsavingarenotthesophisticatedinvestorsorhighnetworthindividualswho

traditionallyhavebeenservedbyadvisors.Theywillbelowtomedianearningindividuals,whomaybe

savingrelativelysmallamountsincashterms,buttowhompensionsavingscouldmakeasignificant

differencetothelevelofincometheyhavetoliveonintheirretirement.Peoplewho,havingbeen

auto-enrolled,willnothavehadtomakeanydecisionsaboutsavingcouldsuddenlyhavetomakevery

importantdecisionsabouthowtobestturntheirpensionfundintoanincome.Findingawaytohelp

theseindividualsthroughtheincreasinglycomplexandeverchangingsavingslandscapeisperhapsthe

biggestretirementsavingchallengewecurrentlyface.



Dr Patrick Nolan (Chief Economist, Reform)

Time to grasp the nettle on the cost of an aging population

Nooneshouldbesurprisedbythefactthatthepopulationisgettingolder.Fordecadesresearchershave

beenstudyingthesetrendsandinvestigatingtheirimplicationsforrelativelygenerouswelfarestates,

likethatoftheUK.Somecountrieshaveevenundertakenmajorreformtomanagethesefuturecosts.

YetrelativelylittlehasbeendoneintheUKtofaceuptothesedemographicchangesandrecentpolicies

willincrease,notreduce,thelongertermcostofentitlements.Thereasonforthisispolitical–with

governmentsbeingunwillingtoriskabacklashamongthelargenumberofpensionerswhovote.

Anapproachofdenialanddelayisnolongeraffordable.Thebiggestchallengeinencouragingactionon

populationageingisthatpeoplethinkthatdealingwiththeproblemcanbeputoff.Oftenitisseenas

aproblemfor2040or2050,whichiswellbeyondtheattentionspanofmanypolicymakersandmedia

commentators.Buttheeffectsofpopulationageingwillbefeltmuchearlierthanthat.TheOECDhas,for

example,recentlyestimatedthattheworkingagedpopulationwillpeakin2015.Indeed,asthePensions

PolicyInstitutehasshown,between2009and2015thenumberofpeopleofstatepensionageorolder

islikelytogrowby457,000andlifeexpectancyat65willincreasefrom21.0to21.7years.Thismeans

thatfromaroundtheendofthisParliamentarytermpolicymakerswillnolongerbeabletorelyona

growingworkingagepopulationtohelpfundincreasinglyexpensiveentitlements.Programmesthatare

currentlyunaffordableareonlygoingtobecomemoreso.

Yetthecaseformovingquicklyisnotjustafiscalone.Peoplealsoneedtobegiventimetoprepare

forchangesinpolicyframeworks.Foranychangetherewillbeagroupofpeoplewhoarerelatively

disadvantagedinthetransition.Thiswillincludepeoplewhoarebelowbutclosetoretirementage

andsowillhaverelativelylittletimetochangetheirplans.Giventhisitmaybetemptingtodelay

anychangestoensurethatthesepeopledonotloseout,butthiswouldincreasefutureproblems.

Populationageingmeansthatmorepeoplewouldbecaughtinthetransitionifthechangeisdelayed

andthatthegroupofloserswouldbelarger.

Whiletheremaybelittlecasefordelayingachangethefactthattheselosersarecreatedmeansthatthe

transitiontoanynewpolicyframeworkwillrequirecarefulconsideration.Thisincludesconsideringhow

toimprovethelabourmarketoutcomesoftheover55sandwhethertocontinuetoapply(grandfather)

existingentitlements.Yetthereislittleevidencethattransitionalissueshavebeengivenserious

considerationintheUK.Insteadtheapproachtakenhasinvolvedshoringupsupportforchangeby

makingthesystemasawholeless,notmore,affordable.Thisisanincoherentapproachthatwillcost

futuregenerationsdearly.

SomecommentatorsmayarguethattheCoalitionhasgraspedthenettleonthesecosts.Ithas,for

example,shiftedforwardtheincreaseintheretirementageandproposedreformofpublicsector

pensions.Yetanysavingsfromthesechangeswillbeswampedbypromisesmadeelsewhere.Shifting

forwardtheincreaseintheretirementagewill,forexample,onlysavemoneyuntil2024,afterwhich

theagewillbebackonitsearliertrajectory.Incontrast,decisionssuchasindexingthestatepensionto

wagegrowthnotpricegrowthwillcontinuetogrowincostandwillalonemeanthatthecostofpensions

willbesome£20billionhigher(intoday’smoney)in2050.


Likewise,proposalstointroduceauniversalstatepensionfornewrecipientsalsohavethepotentialto

significantlyincreasecosts.Thereisaviewthatauniversalpensioncouldreducethecostofpension

benefitsthroughavoidingtheproblemsofmeans-testingdiscouragingsavingsandthepotentialloss

ofbenefitsfromcontributionstoNationalEmploymentSavingsTrust(NEST)pensions.Whileitisclear

thatpeopleintheUKneedtoincreasetheirsavings,theexperiencewithuniversalpensionsincountries

likeNewZealandhighlightsthattheintroductionofthispolicyisunlikelytoprovideasilverbullet.The

universalpensioninNewZealandisamajorreasonforthelowhouseholdsavingsratesinthatcountry.

Incentivestosavearereducedwhenpeopleknowthattheywillreceiveabenefiteveniftheymakeno

preparationfortheirownretirement.

TheCoalition’splanswillnotputthesystemofretirementsupportontoafiscallysustainablefootingand

willmakethechoicesfacingfuturegenerationsevenharder.



Wendy van den Hende (Chief Executive, Personal Finance Education Group)PFEG(PersonalFinanceEducationGroup)isanindependentcharityhelpingschoolstoplanandteach

personalfinancerelevanttostudents’livesandneeds.Itsmissionistoensurethatallyoungpeople

leavingschoolhavetheconfidence,skillsandknowledgeinfinancialmatterstoparticipatefully

insociety.

Thiscontributionwill,therefore,focusonissuesrelatedtochildrenandyoungpeopleandtheir

financialeducation.

The big challenges

Manychildrenaregrowingupinfamiliesandcommunitiesthatgrapplewithpoorlevelsoffinancial

awareness,lackofinformationaboutrelevantproductsandservices,under-developedfinancialskills,

unstablepersonalfinancialcircumstancesandcompetingpressuresonspending.

Onechallengeisawidespreadlackofawarenessoftheneedforfinancialeducationinadditionto

provisionoffinancialadvice.Financialeducationshouldbeseenasaneffectiveearlyinterventionto

preventfutureproblemswithunmanagedpersonaldebtandpoorpreparationforretirement.

Thereisaneedtoincreaseunderstandingthatfinancialcapabilityisalifelongprocess–acontinuum

alongwhichpeoplemovethroughoutlife.Financialeducationisessentialtohelpyoungchildrenbegin

thejourneyalongthecontinuum.

Childrenareinteractingwithmoneyissuesearlierandearlier.Weknowthattheyareengagedwith

financialservicesandproductsfromaveryyoungage–childrenhavemobilephonesfromaged8,they

arepurchasingitemsonlinefrom10–eitherusingparents’cards,orincreasingly,prepaidones.They

havetomakecomplexdecisionswhentheyareyoungandinexperienced–aboutwhetherauniversity

educationwillbeagoodinvestment,whethertheywillthenearnenoughtopaybacktheloan,whether

ornottotakeoutcreditcardsorstorecards.

Inschoolscompetingpressuresoncurriculumtimeandaccountabilitymeasuresthatencourageschools

tofocusonacquisitionoflargenumbersofqualificationscansqueezethetimeforessentiallearning

forlife.

Wheretheneedforfinancialeducationisrecognisedanadditionalchallengeistoequipteacherswith

theconfidenceandcompetencetoteachit.

Mostofallthereisahugechallengeinmotivatingschool-agedchildrenandyoungpeopletothinkabout

long-termplanning.Retirementseemsaverylongwayawaywhenyouhavenotyetembarkedupon

workinglife.Alongsidethisaretheinfluencesonspendingexperiencedbyyoungerage-groups–the

pressuresofconsumeropportunityandchoicecompetewiththeneedtoplanahead.


Clearlytheultimateaimmustbetodevelopafinanciallycapablesociety.Financialeducationforchildren

andyoungpeopleisessentialtothis.


Education

Thesinglemosteffectivelong-termsolutionistodevelopinschoolsasystematicprogrammeoffinancial

educationwhoseaimistoenableyoungpeopletodevelop:

• knowledgeandunderstandingtoinformjudgmentsanddecisionsaboutmanagingmoneyintheir

presentandfuturelives

• appropriateattitudesthatarereflectedintakingpersonalresponsibilityformoneymanagement,

questioningtheclaimsofsomefinancialproductsandevaluatingavailableinformationbeforetaking

financialdecisions

• financialskillsthataredemonstratedthroughday-to-daymoneymanagementandplanningfor

futurefinancialneeds,suchasbudgetingforweeklyhouseholditems,monitoringbankaccountsand

creditcardsandcheckingwhethersavingsandinvestmentsaremeetingfinancialgoals.

Sucheducationmuststartassoonaschildrenbeginschoolandcontinueuntiltheyleavefulltime

education.Earlylearningprovidesafirmfoundationonwhichtodeveloppositivefinancialattitudesand

buildfurtherknowledgeandskills.

Financialeducationwillenablethemtothriveratherthanmerelysurviveastheymoveinto

independence.

Supporting saving

Aswellaslearningwhysavingisimportantwemustgetchildrensavingfromanearlyage.Onlybydoing

so,canwebesurethatthesavinghabitisestablishedandembeddedasawayoflife.

Schoolbanksaremakingacome-backbutsomeschoolshavedifficultyinfindingabanktosupport

them.Supportforschoolbanks–preferablywithyoungpeoplehelpingtorunthem–wouldlinkfinancial

educationwithfinancialaction.

Outsideschool,nowthattheChildTrustFundhasbeendiscontinued,weneedtolookagainat

incentivesforyoungerchildrenandtheirparents.Istherearoleforthefinancialsectorinpromoting

savingsschemesforchildrenasacorporateresponsibilityactivity–notforprofitschemes–ratherthan

commercialones?

Oncetheyhavesavedasyoungchildren,incentivescouldbeprovidedforteenagerstosavefor

universityeducation,foracartotraveltoworkorinanticipationoflivingindependently.Withsavingfor

thefutureestablisheditwillbeeasiertoencouragesavingforretirement.



44 http://www.fsa.gov.uk//pubs/other/fincap_baseline.pdf45 http://www.moneyadviceservice.org.uk/_assets/downloads/pdfs/20100709_transforming_financial_behaviour_summary.pdf

Jackie Spencer (Later Life Policy Advisor, Money Advice Service) ThebiggestchallengefacingtheUKinsavingforretirementismanypeoplearepoorlyequippedtoplan

aheadandmakeinformedchoicesaboutfinancialproducts.

TheFSAcarriedoutalarge-scalesurveyintothefinancialcapabilityoftheUKpopulationwhichwas

publishedin2006.Evidencefromthissurveyshowsthatlargenumbersofpeople,fromallsections

ofsociety,arenottakingbasicstepstoplanahead,suchassavingsufficientlyfortheirretirementor

puttingmoneyasideforarainyday.44

Respondentsunderstatepensionagewereaskedabouttheprovisiontheyhadmadepersonallyfortheir

retirementandalsowhethertheywouldbeabletomakeendsmeetonthestatepensionalone.

• Overfourinfive(81%)saidthatgovernmentpensionwouldnotprovidethemwiththestandardof

livingthattheywouldhopeforinretirement.

• Despitethis,onlytwoinfiverespondents(42%)whowerenotyetretiredhadacurrentpersonalor

occupationalpension.

• Theresultsindicatedthatoverathird(37%)ofthosewhofeltthatthegovernmentprovisionwould

beinsufficientdidnothaveanyadditionalpensionprovision,indicatingarelativelysmalldegreeof

planningaheadinthiscontext.

• Overtwoinfivepeople(42%)puttheircurrentstandardoflivingbeforetheirretirementplanning,

agreeingwiththestatement‘Iwouldratherhaveagoodstandardoflivingtodaythanplanfor

retirement’.

Asmanypeoplehavelowfinancialcapability,increasingsavingsforretirementwilldependonproviding

goodfinancialeducationandadviceaboutmoney,toequippeopletounderstandtheirfinancialchoices.

Webelievethatourprovisionoffree,unbiasedmoneyadvicethroughtheMoneyAdviceServicewillbe

essentialtohelppeoplemanagetheirmoneybetter,andsoimprovethequalityoftheirlives.

InJuly2010,theMoneyAdviceServicepublishedTransformingFinancialBehaviourresearchwhichis

designedtolearnhowwecanusethefindingsfrompsychologyandsociologyalongsidemoretraditional

policyinterventionstofosterbehaviouralchange,andinparticular,tofindpracticalwaystocreatean

environmentthatsupportsenduringfinancialcapability.45Thefindingsunderlinetheneedforfinancial

educationandadvice(aswellasinformation)tosupportpeopleinmakinggoodmoneydecisions.These

learningsfrombehaviouralscienceareincorporatedintoournewon-linetool,theMoneyAdviceService

healthchecktobelaunchedinmid2011.Thison-linehealthcheckwillprovideapersonalactionplanto

helppeopleidentifyandaddresstheirmoneyprioritiesneedssuchassavingforretirement.


Conclusion and CII viewFromtheresearchconductedandstakeholdercontributionsreceiveditseemsclearthat,apriorand

necessaryconditionforincreasedsavingsisforthegeneralpublictobeconvincedthatsavingmoreis

intheirlong-termbestinterests,andfurther,thatlegislationwillbeenactedtoensurepromisesfrom

suppliersarekept.FromtheCII’sperspectivetherearethreeareasinparticularwherewethinkmore

effortmustbemadeinordertomeetthisnecessaryconditionforincreasedsavings.

• Thescaleoftheproblemismassive–elderlypeoplewhohavenotsavedandwhocannotrelyon

thestatefacethepossibilityofhavingtousevirtuallyalloftheiraccumulatedwealthiftheywish

toachieveanadequateincomeandpayforlong-termcarecostsduringretirement.Thisfrightening

messagemustbecommunicatedtothegeneralpublicbyGovernment,industryandconsumer

bodiestolettheconsumerknowjustwhatisatstakeiftheychoosetodonothing.

• TrustisakeyissueandtheindustrymustembracereformssuchastheRetailDistributionReview

andtheforthcomingsimpleproductsregimewhicharebothaimedatimprovinglevelsoftrust

aroundfinancialservicesandproducts.Ontheflipside,theaimsandsuccessesofsuchreformsmust

bewellpublicisedortheywillhavelittleeffectinchangingconsumerattitudesandbehaviours.

• Thegeneralpublicneedscertaintyaboutthefuturesavingslandscape.Thisishardtoachievegiven

theconstantlychangingmacroeconomicandpoliticalenvironmentintheUKandabroad.However,

GovernmentandOppositionmustdotheirbesttoprovidecertaintyaboutfuturerules–making

cross-partysupportforthelatestsetofreformsimportant.Withmajorreformsonthewaypolitical

consensusmustthereforenotjustbestruckontheanalysisoftheproblemsbutonthesolutions

aswell.ButmoremustbedonetoinvestigatehowtheGovernmentcanguaranteeasecureand

predictablelong-termsavingsenvironmentoverthedecadestocome.

Itisclearthatweareatacrucialjunctureforsecuringmajorreformstoprovisionforretirement.Future

generationsmustbeabletolookbackatthismomentasawatershedwhenwemadethenecessary

changestofairlyaddressthelongevity‘timebombs’andnotwhentheimpetusfordeepandmeaningful

reformwasspurred.

conclusion and CII view


CIILaurence Baxter

HeadofPolicy&Research

CharteredInsuranceInstitute

20Aldermanbury

London

EC2V7HY

Email:

[email protected]

About the Chartered Insurance Institute (CII)

Professionalism in practice

TheCIIistheworld’sleadingprofessionalorganisationforinsuranceandfinancialservices,withalmost

100,000membersin150countries.

Wearecommittedtomaintainingthehigheststandardsoftechnicalexpertiseandethicalconductinthe

professionthroughresearch,educationandaccreditation.

OurCharterremitistoprotectthepublicbyguidingtheprofession.FormoreinformationontheCIIand

itspolicyandpublicaffairsfunction,includingexamplesoftherangeofissuesinfinancialservicesand

insurancethatwecover,pleasesee:

www.cii.co.uk/policy

Who to contactw

ho to contact

The Chartered Insurance Institute 42–48HighRoad,SouthWoodford,LondonE182JPtel:+44 (0)20 8989 8464email:[email protected]:www.cii.co.uk

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