With the speculation of a change in pension tax from last year’s budget and then the consultation on Targeted Support for pensions, there is a lot of focus on saving for retirement. In light of this, we are revisiting the recommendations in the Pensions and Lifetime Savings Association’s “Five Steps to Better Pensions” report. There is a lot to agree with in that report, but there are also a few things we wish had made it in there.
So we thought we’d write down our thoughts and share them with you. Please let us know what you think. Oh, and one small thing – please don’t think we are criticising what we think is a great and important effort. We are just seeking to add to the discourse and improve on what is already a great start.
What we like
The report continues a debate on something that affects us all, that only around 50% of the population are projected to meet the retirement income targets set by the 2005 Pensions Commission, and under pensioned groups face poverty in retirement in large numbers. That alone makes this document a huge success. Its existence will make others talk, respond, change practices, change products, and more. And that’s a very good thing.
It frames the problem correctly… Well, nearly
The report frames the problem as an adequacy challenge – generating enough income in retirement to meet one’s expenses in retirement. It touches on the impact of longevity, health care, long term care, housing affordability and costs. We agree.
It considers the self-employed and those employed in the gig economy.
We often wonder why auto-enrolment excludes the self-employed. We’re glad this report doesn’t, and that it makes specific suggestions about taking care of them. After all, there are 5 million self-employed people in the UK and that figure is growing.
It considers the importance of stable taxes on retirement income and pensions
In the run up to the Autumn 2024 budget, people with significant pension funding have made decisions on taking pension lump sums based on press speculation about a “pensions tax raid”. It never happened, but the damage in undermining general confidence in pensions was done.
We all face enough uncertainty in our futures without the government adding even more. It’s time for cross party consensus on how much we should spend on pension tax relief and for successive chancellors to stop looking to pensions to plug their short term spending gaps.
It tips its hat to passive action
As with auto-enrolment before it, the report understands that inertia is a powerful force of nature. So it describes proposals that involve the end consumer doing absolutely nothing and yet improving future outcomes.
What we wish was in there
There’s a lot we wish the PLSA working group had considered. Here are a few thoughts.
A few “table-stakes”
Two things seem rather obvious to us.
The first is that having a number of small pension pots lying all over the place that you have no oversight of is not good. The second is that being able to see all your finances – including your pensions – together in one place is good. Neither the Pensions Dashboard, nor Open Banking goes far enough in this regard. Such a feature is an enabler of other helpful features, like the ability to keep consumers on track.
The report doesn’t talk about either of these things. We wonder why.
More about the “nasties”
There’s no question we’re all going to be spending much more on healthcare and long-term care during our lifetimes than our parents did. The report touches on this, but we wish it had dug deeper. If you can’t quantify a problem, you can’t solve it.
We believe a good planning framework must help people understand these issues using available data and sensible assumptions. On that front, we love the Vanguard/Mercer report on “Planning for health care costs in retirement” and believe much of what it says applies in the UK too particularly in respect to the cost of long term care.
We would like to see the financial services and healthcare industries design better and cheaper solutions to help people protect against these “nasties”, and we will do what we can to help.
This will then help answer the question “How much is enough?”
The role of things other than saving and investing
Most people will need to rely on insurance and “wise” borrowing to achieve the future (and the retirement) they aspire to. Saving into a pension and investing in the markets are important, but they won’t be enough.
Likewise, we believe people need help to understand their choices and trade-offs, not only the financial ones but also (non-financial) life choices that can impact their financial futures.
Our experience tells us that if you frame the solution in terms of “save more, spend less”, it is likely to fall on deaf ears.
The affordability dilemma
For most people in their 20s and early 30s, sacrificing the kind of income figures indicated in this report simply isn’t realistic. It isn’t safe to assume that because the young didn’t opt out when the figures were tiny, they won’t opt out as those numbers increase and their take-home pay is truly pinched.
The report touches on day-to-day expenses that are spiraling out of control, like the cost of owning or renting your home, the cost of higher education, the cost of decent health care (beyond what the NHS can provide) and long-term care.
What it misses, in our view, is that the “retirement challenge” is in fact a problem of meeting uncertain future expenses over an uncertain time frame with uncertain income sources and assets. Underneath the adequacy challenge sits a much bigger monster – the uncertainty challenge.
Our experience tells us we need to look well beyond income to solve this problem. We need to rethink the role of insurance, “wise” borrowing and the state support mechanisms. And we probably need to think of a “glide-path” on retirement contributions during one’s working years instead of the current flat-line approach.
That’s why the Envizage methodology simulates uncertainty on both sides of a household’s finances: what comes in and what goes out, plus what it owns and what it owes. And that’s why we boil down the choices to a set of real-world actions that people can understand, engage with, and put into practice.
Numbers don’t engage; and words even less so
We think any attempt to get people to engage with their future outcomes needs to be focused on emotions, and not on rational or logical pathways. Yet another “retirement savings calculator” isn’t the answer. Neither is a bunch of reading material aimed at “financial literacy”. We all know literacy and numeracy are serious problems in the UK. More numbers and words are not going to help.
Push-me-pull-you
Some actions have unintended reactions. If employers feel their contributions are so high that they affect profitability or solvency, they will hire fewer people or let people go more easily when things turn sour. This may be particularly acute following the recent rise in employers NI costs.
Targeted Support
We welcome the FCA initiative on Targeted Support, but this should focus on more than just the pension pot. They should take a much more holistic view of sources, uses and uncertainties. They should account for the fact that for most people, their pension pot is going to be one of several sources of how they pay for their later years.
And so …
We admire what the PLSA and steering committee have set out to achieve with this report.
This is a massive and important problem that can harm future generations if we fail to address it. The PLSA are on the right lines, even if we do wish they had gone much further. That said, we know it isn’t easy to align so many different opinions, and as a result, committees can sometimes deliver watered-down outputs.
We see this report as a solid start to what needs to be an effective and collaborative long-term effort across financial services, technology and policy-making. This is essential if we’re to put a dent in the challenge of uncertainty and give future generations the best chance at success.
How Envizage can help you and your customers (or members)
We’ve built Envizage’s holistic advice engine to help people everywhere understand the risks and uncertainties that lie ahead, and to help them make more informed choices to improve their future.
Our engine is holistic. This means it considers the big sources of uncertainty to our future that we can anticipate and protect against. It also means it considers the many different ways in which we can prepare for and protect against these uncertainties. Some of these are through financial products and solutions, and many others aren’t.
Our engine can power different propositions from guidance, Targeted Support and advice, depending on what the firm is happy to provide. This means it thinks through various ways a household can improve or achieve its desired future. It lets the household play with and visually explore these choices and trade-offs, to decide which are right for them.Thinking about long-term futures is not engaging for most. It can make others anxious. With Envizage, it doesn’t have to be that way. We help our clients create unique, engaging and – dare we say – fun user experiences that help their customers and members understand and improve their futures.
To learn more about how Envizage helps banks, insurers, assets managers and pension funds better serve their customers and members, get in touch: contact-us@envizage.me
