The emergence of the Freedom and Choice of Pensions Consultation in this year’s Budget has demonstrated that pensions as we know them are no more. The requirement to annuitise pension savings has been removed and is a fundamental change in how people can access and use their pension savings. As a result of these changes, I therefore believe workplace pensions should now be seen as a form of long-term savings, as this is what they will offer.
Flexible choices for flexible lifestyles
As the UK no longer has a default retirement age, people are likely to work until as and when they need to. For this reason, it is only appropriate that their pension schemes have the inbuilt flexibility to reflect their retirement lifestyle decisions. I think that the Budget changes will offer employees this personalisation, so they can structure their savings accordingly.
Now, I’m not saying that the new changes will create a perfect retirement landscape. Clearly, there are risks and still a lot of work to be done. For instance, although the emergence of Auto-Enrolment in 2013 has put millions of workers into pension schemes (who previously weren’t in one), it has not necessarily made those people more engaged about their retirement savings.
Too little too late?
This has been evident through the high number of scheme members that are only paying the minimum contribution levels into their pension pot. In my experience, people only become more interested in their pension assets when they reach noteworthy value. Unfortunately, with such low contributions going in, it will be a long time for those people to reach that stage. Moreover, I fear that by the time of their engagement it will be too late for them to catch up.
Having said that, I do think that the perception about pensions is changing (albeit slowly) and the changes outlined in the Budget this March are definitely a step in the right direction.
Namely, the shift from pensions to more long-term savings options will mean that retirement savings will benefit from the perceived good value associated with general savings products such as ISAs (i.e. their tax-free efficiencies) and will now sit alongside these shorter-term savings vehicles.
An opportunity to make a step change
In my view, this focus on savings is significantly more supportive in encouraging further people to save and to save more than in traditional pensions with the associated lack of transparency, trust and long list of provisos that has tended to go with these arrangements.
Furthermore, I strongly feel that this aforementioned focus needs to be embraced by the industry as well as scheme members. We have a great opportunity to make a step change in how seriously employees take their retirement savings; however, at present, I simply do not think that this is being taken forward due to these negative associations.
Little commercial incentive
Part of the problem seems to be that there is little commercial incentive for companies to actively communicate the importance of their employees making more retirements savings. After all, as employees pay more into their company schemes, typically so must the employer (who typically must match their contributions). For small companies or those that are struggling financially, this can become burdensome.
Nevertheless, it should still be their responsibility to ensure that they are providing favourable outcomes for their employees. Indeed, whereas defined benefit schemes took on all the risks to deliver this, defined contribution schemes today do not offer the same level of accountability to an employer, manager or provider and therefore without their support, members could suffer.
A more fit for purpose model
For this reason, I believe that the industry needs to be even more vigilant of schemes in order to make sure that they are running appropriately. Otherwise, we could see the recent improvements in positive value for workplace savings being made in vain.
Although the Freedom and Choice of Pensions Consultation is of course not a return to the heyday of Defined Benefit schemes of yesteryear, I do think that the government is advocating a far more fit for purpose long-term savings model for the UK. However, in order for members to reap the benefits from it, sponsoring firms and the wider industry have a responsibility to encourage the uptake into these long-term savings arrangements.
This dialogue needs to start now. If it doesn’t start soon, the positive changes to pensions in the Freedom and Choice of Pensions Consultation could be in vain and potentially lead to bigger problems in years to follow.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.