All of a sudden, pensions are rarely out of the news. From changes to the state pension, through to transparency of investment charges and outright fraud. Largely as a result of auto-enrolment, thousands of workers are now in pension schemes and those approaching retirement have complex decisions to take as a consequence of pensions liberation.
Today, I was at the annual TUC pensions conference, probably the best of its kind, covering the full range of pension policy issues facing schemes across the UK.
Paul Nowak, Deputy General Secretary of the TUC, set the scene. Big issues for unions include improving auto-enrolment, a success, but weaknesses need to be addressed. Pensions adequacy in DB and DC schemes - there are no 'gold plated' schemes for most workers. The state pension needs to be protected and restricting access should be resisted. Intergenerational inequality, particularly for young workers facing insecure jobs and poverty wages is covered in a new TUC report today. Finally, stronger unions mean better pensions, so we must continue to organise to secure better pensions for all.
Richard Harrington MP, the UK pensions minister, highlighted the gap between the state pension and what most people need for a comfortable retirement. This means occupational pensions have a lot to do, around £10,000 a year (£250k pensions pot). He accepted that the move from DB to DC schemes has shifted responsibility from employers to employees, who need to take much greater interest in their own pensions. Auto-enrolment has been a success, although smaller employers still have much to do. When contributions reach 8%, cost may be an issue, but the benefits have to be promoted. He recognised difficult issues including adequacy and access - these will be addressed in the forthcoming review.
He referred to coming Green Paper on DB pensions. Issues for that review include consolidation of schemes to reduce costs and widen investment opportunities. The way pension funds are valued and inflation proofing. The role of the Pensions Regulator, fairly light touch compared to FCA, as Philip Green case illustrates, do they need more powers? Perhaps he should look at equality of treatment between dividends and payments into pension schemes! He noticeably avoided answering a question on that point!
Government is also working on better consumer protection. Consolidating guidance bodies and tackling scams. The Pensions Bill in parliament is also addressing the master trust issue. Overall, his contribution was well received, certainly in listening mode, even if he ducked some of the difficult issues on adequacy and the state pension.
Ian Baines from Nationwide, presented a case study on how they improved adequacy of their DC scheme with higher employer and employee contributions. An impressive communications campaign persuaded more staff to pay more to get more out of their pension.
Steve Webb, former pensions minister, talked about pensions and the self-employed - bogus or not. Latest figures show only one in seven in a pension scheme. Self-employment now covers large numbers of people who would have been employees in the past. He argues that Class 4 NI contributions could be redirected into voluntary pension schemes, similar to auto-enrolment for employees. Of course the problem could also be reduced if we ended bogus self-employment.
Labour peer, Patricia Hollis, covered sex discrimination, quoting Scottish Widows research - the problem for women and pensions is that their lives do not mirror those of men. For example, half of women end pension contributions at childbirth. She was particularly critical of pensions liberation, which is being used to clear problem debts. She recognised gains from auto-enrolment, but the low pay threshold and rules on aggregating employment, has hit women harder than men. She called on the government 2017 review to tackle discrimination against women by introducing a blended product between savings and pensions.
Daniela Silcock from the Pensions Policy Institute talked about what information people need about pensions. In an interesting approach, she looked at information needs at different times of life, from childhood to adulthood to approaching retirement and finally in retirement. Research shows that better financial education results in a significant improvement in financial capability. Even numeracy levels are low in UK.
The afternoon session started with an examination of the impact of pension liberation. Ignition House have undertaken detailed research with more than a one thousand participants, focusing on middle income pension pots. The publicity did generate an initial sense of excitement, but also concern that savers might make wrong decision - 'pensions are a minefield' was the most common response. However, there is also a short-term, optimism bias, with a tendency to ignore risk or develop confirmation bias.
People are also struggling to cope with the plethora of information available, although there was good awareness of the Pension Wise advice service - even if few used it, although those that did found it useful. Very few used a professional advisor, beyond an initial consultation. There were issues of trust and past poor experience, coupled with high cost and advisors unwillingness to deal with smaller pension pots. Most people in the study failed to make a decision, those who did took a lump sum, viewing it as cash to spend today, not a lifetime decision. They had limited idea of how the balance is invested and what the charges are. This included some frighteningly risky investments. The research indicates some sensible reforms, but the bottom line is that this is just too complex for most people.
The session on DB schemes highlighted the huge numbers that still rely on these schemes. They are not as badly funded as many claim - First Actuarial calculate a £270bn surplus in DB schemes. Gilts plus actuarial valuations need to be challenged, as they significantly overestimate liabilities. Shock headlines need to be challenged as they are often used to soften up employees.
The final sessions focused on the review of the state pension age by John Cridland. He is coming to Edinburgh this month, so I will cover that issue in a separate blog. I sadly missed what looked like a fascinating debate between John Kay and the Investment Association on active fund management costs, but my blog on the recent FCA report covers the issue.
As you can see there's a lot going on in pensions. The message from this conference is that we all need to take a lot more notice of what's happening. We should all be pension geeks now!