'Pensions: time for a few new year's resolutions'

Nothing I can do or say can make any difference there, but where I can make a tiny grain of difference is in pensions at home. Our current system only gets a B grade from Mercer in its 2023 global pensions index.

A leading nation like the UK should not be content with a B grade for any aspect of financial services. Use all your power to get that A grade in 2024. In daily work with clients, advisers can really make a difference, often far more than the industry behemoths, from life coaching to securing their future.

I have spent nearly 40 years reporting on pension scandals, from Maxwell, Equitable Life to transfers, rip-offs, high charges and generally finding flaws with every purple prose PR pensions note in my inbox from financial institutions.

There is too much toleration of the mediocre, particularly from government, rather than striving for perfection. 

So, how can the UK get an A grade in pensions? A good pension system should be backed by oodles of money, whether from the state, the individual or the employer.

Among the dozens of pressing pensions problems, low pension contributions and the chaotic ‘at-retirement’ market are of greatest concern.

Behind the best pensions is money, money, money, no matter what the system, be it state, funded, unfunded, defined contribution, defined benefit, cash balance, collective defined contribution, or personal pension. 

Advisers, remember the acronym Kiss (keep it simple, stupid). Recently a relative asked me for pension advice. I told him to go to one of the many excellent IFAs. His response was “they confuse me”. That is not an unusual response.

Pensions should be as user friendly as a utility, just as accessible as clean water coming out of tap – we don’t need to know about chemical treatment of sewage.

In pensions even apparently the simplest and the best pensions – final salary pensions - are fiendishly complicated behind the scenes with liability hedging, longevity swaps and so on all in the mix.

Build a state pension to last

For me sustainability and predictability are key: remember the massive haircut Greek state pensioners took after the financial crisis of 2008, so a large pension is not enough in itself, it must either be properly funded by contributions or the GDP must be growing so it can be financed out of tax. 

The now unsustainable final salary scheme enjoyed by millions was the perfect pension, but employers just cannot afford the expense, volatility and longevity of the members – those risks are now born by the unfortunate employee. 

I do not believe in starting from scratch again – it would be a total nightmare for everyone involved. Perhaps we should have stuck with Serps (state earnings related pension schemes) rather than have gone down the auto-enrolment route, but would Serps have been unsustainable? I am no actuary. I just don’t know. We are where we are.

The most glaring gaps in today’s system

Looking at today’s system, the most glaring gaps are in AE: the self-employed, low paid, and gig workers with several jobs. There are around 5mn self-employed people, with at least 3mn without any sort of pension.

I would like to see HMRC auto-enrol all the un-pensioned self-employed into Nest or equivalent. Additionally, the vague concept of a ‘worker’ for AE purposes is too often the subject of major court battles – remember Uber? There must be new regulation to tidy this up.

The lost pension generation

Among the dozens of pressing pensions problems, low pension contributions and the chaotic ‘at-retirement’ market are of greatest concern.

Indeed, the 2015 freedom and choice reforms have left many consumers floundering at retirement. Should we reinstate a minimum income requirement of perhaps £15,000 a year, including state pension, before allowing people to do drawdown?

And a looming retirement shortfall for people in their 40s and 50s is only 10 years away. That age group may have missed the boat, too young to benefit from good final salary pension schemes and too old to make the most from AE.

Current DC retirees are all just human guinea pigs in a giant experiment on drawdown.

Young people are also at risk from the number of jobs they will hold down in their lifetime, accruing dozens of pots. 

AE pension contributions from both employers and their staff must rise, ideally this year. There has been far too much procrastination already, 16 years after the reforms the legal minimum employer contribution is still only a miserly 3 per cent. 

Employers’ legal AE contributions should at least match their workers’ contributions with a 5 per cent pension contribution from the employer and 5 per cent from the employee. 

Meanwhile, in the public sector (where DB pensions still predominate) the average employer contribution is at least 18 per cent. By contrast, most private sector employees are often on the bare minimum required by law – 3 per cent. Is this a sensible pension policy?

Today’s retirees are often ‘lab rats’

Current DC retirees are all just human guinea pigs in a giant experiment on drawdown; only one in 10 take advice yet 9mn people will be coming up to retirement in the next decade.

Some retail charges can be as high as 2 per cent when you take into account the platform charge, the IFA’s charge and the DFM charge – this is often nicknamed 'pound cost ravaging'. Yet institutional products can charge as little as 0.35 per cent.

People are leaving workplace schemes at retirement for the sometimes spurious advantages of retail products, often because trusted workplace brands do not offer every single retirement bell and whistle.

One in four people struggle with numbers

Financial literacy is low. Financial Conduct Authority figures show about 25 per cent of people have poor numeracy – should they be left to their own devices at retirement?

In an ideal system financial education is vital for everyone, starting with school kids – concepts such as the power of compound interest, percentages and avoiding scammers are as important as being able to read and write.

No one wants change every five minutes.

It should also be a legal requirement to provide financial guidance as a standard employee benefit at all firms with more than 100 employees. Employers spend millions on pensions provisions for the staff but too often leave them in the lurch at retirement.

They have a moral responsibility to do more. Yet legislation also prevents trusted employers from doing anything resembling financial advice.

Your ‘bread and butter’ work

Help others to help yourself, as so many good advisers are already doing. Financial education, whether in schools the workplace, universities or individual coaching of clients, should be every adviser’s bread and butter – the emphasis on life coaching and ‘hand holding’ was how SJP became a successful FTSE 100 company.

Why not visit your local university, college or school and offer your services? Such work, even on a pro-bono basis, could not only benefit the community but lead to more business.

We need a 70-year time horizon in pensions

No one wants change every five minutes. On tax, pensions don’t currently work for anyone, neither the poorest in society or indeed the prudent middle earner who could easily overfund their pension in 40 years. 

Recently I was at a National Portrait Gallery lecture (highly recommended) on how they preserve their fine 500-year-old Tudor portraits for posterity.

The conservation expert told me that when a painting was overhauled, repairs were expected to last for 70 years. It should be the same for pensions.

Yet reforms don’t seem to last for five years, let alone 50 years. Thousands of people near the lifetime limits do not want to overfund their pension if Labour changes all the rules, yet again. 

Despite this diatribe, the UK is still a pension top 10 nation – a respectable rating but we all could do so much better. Time for a few pensions industry new year’s resolutions?

Happy new year!

Stephanie Hawthorne is a freelance journalist