Are we in danger of sleepwalking into a defined contribution (DC) pension crisis? No doubt investment advisers will say, “Not where our clients are concerned”. But that is not the point.
The big issue is that many people are simply not investing enough to get anywhere near replacing their income. Yet no one, I feel, is seriously debating the issue.
As with just about everything in financial services, the whole thing is a little complicated. One related debate concerns the long-term liabilities of state pensions, public sector defined benefit pensions and, to a lesser extent these days, private sector defined benefit plans. This is usually described as a pensions ‘timebomb’.
I am not with the most pessimistic of the debt ghouls, who tend to add up liabilities as if they all fall due on the same day, thereby justifying hysterical predictions about the ‘end of Britain’.
Nonetheless, taken in conjunction with the likelihood of prolonged anaemic growth in the Western economies, and the UK’s current account and stubborn budget deficits, there is the risk it could add up to a substantial crisis in future.
But this is not quite the crisis on which I want to focus. It is the fact that we expect DC to do the heavy lifting without equipping it with the necessary tools to do so – and, at times, even remove some of those tools.
It is interesting that former adviser Michelle Cracknell, the boss of The Pensions Advisory Service, frequently says her job will become much more important when people start retiring with DC savings alone – that is, not too far into the future.
This could be a slow-motion crisis, taking the form of a series of mini personal crises as people try and call on their financial reserves when they simply haven’t set enough aside.
So, what is to be done? Well, it’s important to recognise what we have first.
There is a significant infrastructure for employer-based pensions which has coped well so far, despite warnings about capacity. Now advisers, too, are playing an important role in spreading this to micro employers.
We also have a fantastic example of the good that can be done in the retail sector in the form of adviser clients, who have had to sit down and work out how much to set aside to meet their goals, including replacing their income in retirement through either pension or Isa savings.
Yet we need to spread the investing habit further and deeper. People need to understand that they will need to set aside more.
The first step is surely to do no harm to the current system. That’s why cutting pension tax relief for senior members of schemes should not happen without a proper understanding of how this might impact attitudes to pension investing within the workforce. It’s also why equalising relief but taking as much as £6bn out of pensions per year is exactly the opposite of what should be done.