Phoenix CIS and the Pensions Management Institute (PMI) recently hosted a roundtable discussion to explore the challenges, and share valuable insights, surrounding one of the most pressing topics facing the pensions and savings industry: the plight of the generation of middle-aged Britons who risk poverty in retirement due to inadequate pension savings.
A range of experts from across the industry gathered to offer their perspectives and suggest potential solutions that would ensure pensions adequacy for older DC savers. The discussion was consistently lively, enthralling and thought-provoking.
Background
Having missed out on gold-plated final salary schemes, many middle-aged workers have only recently started saving towards a pension through auto enrolment. They are running out of time to build up a pot that is sufficient to support them in retirement.
The pace of reform has been slow, but is it too late to improve outcomes for this so-called ‘lost generation’ of pensions? The panel considered the options for changes in policy, behaviour and operations that would allow providers, asset managers and regulators, working together, to maximise Defined Contribution pension savings and investment returns for workers who have less time to prepare for retirement.
The discussion focused on four key areas:
- Increasing auto enrolment contributions to boost pension pots
- Supporting DC savers to understand and engage with their pensions
- Optimising investment strategies to maximise outcomes
- Plugging the advice and guidance gap for DC savers approaching retirement
1. Increasing auto enrolment contributions to boost pension pots
The session began with the observation that the generation in question are far more preoccupied with issues of debt, housing and their children’s wellbeing than with pensions. The example was given of paying down debt to free up money to save for the deposit on a house.
Those who are renting have no additional money to save for retirement while others consider their home to be part of their retirement savings. There is a tendency to see pensions as separate from other issues of financial wellbeing.
It was pointed out that, while a large proportion of a saver’s pension pot can be built up in the first 10 years of saving through compounding, many in the Lost Generation missed out on these vital early years of saving prior to auto enrolment.
Generation Rent and the Lost Generation
Participants noted some are opting out of pensions due to the cost of living and cost of rent. They are therefore losing out on free money in the form of matching contributions from employers.
It was mooted that auto-escalation could address this problem by increasing percentage contributions annually, in line with pay increases, although there was some pushback on this idea if enforced, as individuals might have to prioritise other expenditure.
For the Lost Generation, it was noted that getting people out of the rental market and into home ownership would help the financial situation of some, since mortgages are often cheaper than rentals and allow people to build up equity. Allowing them early access to their pensions to purchase a property might not only help them achieve this but could also free up income for higher pension contributions in future.
There was sympathy for the view that increasing auto enrolment default contributions would be safe for median earners and allow them to save more.
The faults with default
However, it was agreed that this would not be safe for those on lower incomes who aren’t able to save more and are struggling to afford a decent standard of living now. The bottom 20% of earners are not receiving even the PLSA minimum income.
Better wealth distribution for essential workers such as NHS staff, teachers and carers was urged by some attendees. A wealth tax was suggested but it was pointed out that this may cause wealthy people to move elsewhere.
There was a feeling that, given the stickiness of default, increasing contributions would hurt some groups more than others in the short term. Compelling women to contribute more would increase the gender pay gap while over-50s, many of whom are unemployed due to ageism in the workplace, would also be hit.
The benefits of improving access to flexible, part-time working were discussed. There was a consensus that helping people to stay in employment as they get older – especially the squeezed Lost Generation whose parents and children both depend on them – would be desirable in terms of maintaining contributions. Many are leaving the workforce as the work environment changes.
2. Supporting DC savers to understand and engage with their pensions
Most participants agreed that the main barriers to engagement are people’s inability to think far ahead and their expectation that their pension savings will not need to last for very long. For these reasons, most people don’t engage until it’s too late.
On a positive note, it was suggested that the term ‘pensions’ was unhelpful and should be replaced by references to short-, medium-, and long-term savings. The success of challenger banks in changing saving behaviours was cited as a good example that pensions could adapt for the Lost Generation.
The potential of pensions dashboards to encourage engagement was highlighted with the caveat that they had to be easy to access – perhaps via the Government Gateway app – in order to be effective. The potential for dashboards to prove confusing for members who have both DB and DC scheme membership was raised.
From education to incentives
One recommendation for countering the general lack of engagement was to embed pensions lessons in the education system, again learning from the challenger banks on how to gamify tools to make them more interesting. However, this does not address the current predicament of the Lost Generation.
Better consumer marketing and incentives – learning from the success of players like Pensions Bee in driving consolidation – was seen as a possible way to improve understanding and engagement. However, there was pushback against this idea as money would tend to go on marketing targeted at making life easy in the short-term, rather than on delivering better member outcomes and returns.
Collective Defined Contribution (CDC) in decumulation was put forward as a way of achieving higher retirement incomes while bypassing the need for engagement. However, it was agreed that it might not be in every member's best interest to be defaulted onto this pathway compulsorily. Those in poor health, for example, may be better off buying an annuity.
3. Optimising investment strategies to maximise outcomes
There was strong support for the idea of giving the Lost Generation greater access to private market assets in their portfolios, despite some concerns about illiquidity. While these are generally seen as long-term investments, it was noted that shorter-term holdings could still provide sufficiently higher returns to make them a worthwhile addition. Access to a global pool of assets was viewed as important, and it was acknowledged that scale and consolidation could help ease liquidity challenges when members needed to access their money.
The benefits of going private
Private market assets were acknowledged to have the potential to outperform public markets while providing sufficient diversification, both by sector and geographically. The Lost Generation was seen as being disadvantaged by their lack of access to such investments.
The caveat was raised that the Lost Generation might not be able to enjoy allocation of private market assets that was meaningful enough to make a real difference to the performance of their portfolio while balancing risk. One suggestion to overcome this barrier was for schemes to change the asset allocation for Lost Generation members to, say, 40% in private markets as against 20% for other members. However, other participants did not agree with this level of risk exposure so close to retirement.
4. Plugging the advice and guidance gap for DC savers approaching retirement
Around the table there was a shared view that savers approaching retirement are largely unprepared for managing their money. Many in the Lost Generation tend to see their DC pensions as a pot of money – a ‘glorified ISA’ – rather than a future income stream.
One expert expressed their situation as going from being protected and unaware (in accumulation) to being unprotected and completely responsible (when approaching retirement and in decumulation). They are left to make decisions by themselves.
It was mooted that employers should pay for advice and guidance, but this suggestion ran into several major issues: affordability; liability for recommending an IFA; the fact that financial wellbeing is not an employment issue; and exclusion of self-employed or unemployed people.
The dangers of DIY pension guidance
While the necessary information is all available online, it was agreed that people don’t have the drive to find out and are reluctant to admit that they find pensions difficult. The need for a change in mindset was raised: the point was made that the Lost Generation has to realise that it is they, rather than their employers, who must step up and take control of their retirement planning.
The degree to which the Lost Generation should be expected to take responsibility for sourcing their own financial guidance was discussed. Since the Lost Generation’s parents largely benefitted from paternalistic DB schemes, they did not need to know about pensions and were unable to advise their children who are on their own.
The compelling case for compulsion
The benefits of compulsion, via CDC, were raised again as a possible way to bridge this guidance and advice gap, since relying on individuals’ self-motivation is clearly not working. It was pointed out that CDC confers many of the advantages of DB schemes while taking account of the fact that most people no longer work for the same employer for life.
Parallels were drawn with how people manage their own health with support from their GP. There was enthusiasm for developing a financial health scheme, analogous to the NHS, in which people got a letter inviting them to a financial health check that would both diagnose and treat any worrying pensions problems. Given the need for a trusted advisor, as is the case with the NHS, it was suggested that this scheme could be run by the Department for Work and Pensions.
It was also agreed that there was merit to reducing the number of choices available to members. Some participants felt it might be best to reserve flexible pensions access for those who already had a certain amount of secure income in retirement.
Key takeaways and food for thought
The following are some of the main takeaways from the roundtable that merit further discussion, debate and research.
- How far do we go with compulsion as a means of bridging the engagement and advice gap? Could CDC be the answer?
- Would a universal system of retirement health checks address the engagement and advice gap? If so, who would be the appropriate, trusted provider?
- Given the lack of appetite for engaging with pensions, how do we improve default journeys which are important for the less engaged?
- Private markets offer superior returns. How do we capture these benefits for the Lost Generation?
We would like to thank the following panel members for giving their time and sharing their valuable insights:
Jess Williams (Phoenix CIS), Kieron Snow (Phoenix CIS), Catherine Foot (Phoenix Group), Robin Ellison (Cambridge Colleges), Tony Pugh (Aon), Aneta Bzikowska (F5), Alison Hatcher (ARH Consulting Services), TJ Hargreaves (Harrods), Stephen Budge (LCP), Mark Hedges (Professional Trustee), Adrian Marchant (Isio).