Who is going to make workplace pensions work better for members?
Oct 3, 2023 10:01:43 AM
In this blog, Ashley Staples, EV’s Product Director, asks what can be done to improve the state of the pensions sector and delves into the challenges pension scheme members face.
Pension contributions – the lack of or low level– have been exercising the minds of pension bodies, regulators, and finance sector observers for what seems like aeons. Everyone agrees that more people must be encouraged, nudged and driven to save money. Hence, they have a better chance of achieving a reasonable standard of living in their retirement.
Let's begin with some stats
Researching these matters has thrown up some bleak facts and figures worthy of scrutiny:
Looking at a study from the IFS (Institute for Fiscal Studies), I see that as many as 82% of private sector pension scheme members, together with their employers, are making pension contributions of less than 16% of earnings, a level that the Pensions Commission has judged to be sensible when saving for retirement.
Yes, there are thorny issues regarding the high cost of living now, but to learn from the IFS that an even higher rate of middle earners (87%) isn’t saving sufficiently for the future, even though they are a cohort you would have thought had more capacity to put money aside, is troubling.
The IFS also reports that over half (53%) of private sector staff holding a workplace pension are making contributions of less than 8% of total earnings, while for 17% of these employees, the level is lower than 5% of pay. Regarding middle earners, 61% are contributing below 8% of earnings.
In EV’s Hybrid and Digital Advice white paper issued earlier this year, we included the Pensions Commission’s estimate that 38% of the working-age population is not saving enough for adequate retirement income.
In cash terms, the Department for Work and Pensions found in 2021 that private sector employees' average yearly pension contribution was £2,110, equating to c.£175 a month. According to Office for National Statistics data, this is under 7% of the average weekly pay of £598.
Not least, the FCA’s 2022 Financial Lives survey shows that while 72% of those earning £30-£50,000 a year are making contributions to a pension, 30% couldn’t say how much they had accrued in their pot. Even when prompted to acknowledge whether their pot was valued above or below £10,000, 12% were still in the dark.
That’s a lot of data, and I join many others in finding this cumulatively worrying.
Are auto-enrolment and pension freedoms a hindrance?
Pensions auto-enrolment that came along in 2012, and pension freedoms initiated in 2015 were useful innovations with laudable aims – to get more people into a pension scheme and to give them more latitude in how they funded their retirement. However, when it comes to taking income upon retirement, it has turned out that the ‘freedom’ of flexi-access drawdown is unlikely to be suitable for many people. This is because most pension pots are grown just via auto-enrolment contributions – which, as we have seen, are generally made at too low a level – and probably won’t have grown enough in value to make this drawdown suitable as the main source of long-term retirement income.
Then, we have the issue of the proliferation of low-value pension pots. The ABI has looked at this and considers that by 2030, there will be some 22 million small inactive pension pots, classified as worth up to £10,000, mostly because of people changing jobs several times over their career and thus being enrolled in a separate pension scheme with each new employer. While the government is considering what to do about this, edging towards a pot consolidation solution, workplace savers at this moment need help of some form or another if they are to understand their prospects in retirement better and then do something sooner rather than later, to remedy financial problems stacking up in their future.
Can some form of ‘advice’ help reverse these trends?
Those contributing too little to their pension would be greatly helped by a financial adviser to get them in better shape for the future. On the other hand, advice firms’ charges are beyond the reach of many scheme members. This is verified in the findings of the lang cat’s Advice Gap paper (2023 issue), showing that just 11% of adults in Britain paid for financial advice within the preceding two years. A simple lack of affordability underlies this advice gap.
Given that chasm, the key issue is how are we – those of us involved in the finance sector – going to help that large number of unadvised people get their pensions back on the right track so they can eventually attain a decent lifestyle in their retirement?
One aspect to keep an eye on is the FCA re-examining the advice and guidance boundary, which may open up opportunities to broaden consumer access to professional assistance with pension savings. But in my view, let’s not wait any longer, as every year that goes by is one year less to remedy contribution shortfalls and one year closer to a less secure retirement.
How can we help?
At EV, we have developed tech that you can apply in the workplace to help pension scheme members get on a better trajectory for their future financial wellbeing.
Our EVDirect Quick Tools are easy-to-navigate digital guidance solutions designed to help employees understand where they stand today and what they can do to improve their prospects. In essence, the individual is prompted by straightforward questions designed to gather key information, e.g., “what is your age?” and “how much are you currently contributing to your pension?”. The answers to these are crunched to calculate a realistic expectation of the person’s future financial position and the budget required to achieve their desired standard of living.
Our tools can be woven into employers’ benefits platforms or portals to financially nudge scheme members. Creating a win-win situation, members are prompted to save more, while pension providers attract more funds to invest for the future growth of everyone’s pension pot.
So what next?
Click below to learn more about how EVDirect Quick Tools can trigger and inspire workplace members to engage more productively with their financial future.