Understanding pensions: they’re not rocket science!

Pension Awareness Day is an award-winning campaign which aims to promote the importance of saving for the future - alerting everyone to think about saving enough for their retirement.

A recent report from the Government suggests that as many as 12 million people are currently failing to save adequately. This not only carries a potentially serious consequences for the individual, but also the workers and taxpayers of the future.

Malcolm McLean, Senior Consultant at Barnett Waddingham, shares four possible ways to help improve the public awareness on pensions.

Hopefully, by highlighting the extent of the problem, people will accept the need to save more money during their working life. This isn’t to just protect themselves from financial hardship, but to secure a better standard of living during retirement.

Having a dedicated Pension Awareness Day is a very laudable initiative, which we in the industry should all support. It is an opportunity to examine why people are not saving and question; what is it about our pension system that needs to change? Over the longer term we need to materially improve public awareness, lifting pension saving to a much more acceptable level than what actually seems possible at present.

Firstly we need a much simpler pension system - one which the average person understands and that is much less off-putting.

People will almost inevitably shy away from things they don’t fully understand. Often, there is quite a lot of information for a person to misunderstand in an individual pension plan. A pension is and should be, another means of putting money away during your working life to give yourself an income during retirement.

It is not rocket science! Yet people continually tell us it can feel like it is. The confusion exists, particularly around the historical complexities like contracting-out rules, GMPs (Guaranteed Minimum Pensions) etc. or, more recently, the transitional stages into the new state pension.

A simpler system doesn’t necessarily mean starting again from scratch – if only that were possible! Accrued rights must always be recognised, but perhaps in a more broad brush way. Pension tax relief, which costs the government billions of pounds a year, is another area which is not widely understood or appreciated - possibly because of the way it is multi-layered and bestowed, via the different mechanisms of either a net pay arrangement or relief at source. It would be simpler - and probably more effective as an incentive to save - if there were a single rate applicable to all and paid up-front as an add-on instead of as a “relief”.

In this and many other areas. the government and the industry need to learn from history and the mistakes of the past. Going forward, they could devise systems and practices which satisfy a consumer simplification test as well as meeting their policy and operational objectives. It is not rocket science and it can be achieved.

Secondly we really have to address the jargon problem- it has bedevilled pensions and frustrated so many of us over the years.

Again, both the government and the industry are culpable in this respect. The awareness campaign encourages pension providers and employers to use more simple language and to look for more creative ways to communicate pension messaging- and rightly so.

There are far too many ridiculous pension expressions that have been around for years: trivial commutation; uncrystallised pension lump sums; flexi-access drawdown. They find themselves into official publications and leaflets and totally bamboozle the public.

There is absolutely no need for such language. It would be good if there were to be a total ban, or a “naming and shaming” policy from the regulator, on its use when dealing with scheme members or indeed the public at large. If ordinary people are confused by our over-complex pension system, then language and explanations should be made as clear as possible.

Thirdly, after persuading people of the need to have a retirement pension plan - we must find a way of encouraging greater engagement with that plan.

The undoubted success of auto-enrolment can be attributed almost to the exact opposite; the fact individuals are automatically enrolled into a pension scheme chosen for them by their employer and told how much they are expected to pay in. Direct engagement comes into play if the employee wishes to opt out, which given the very low level of the contributions required of them, is so far relatively rare.

The downside is that millions of employees are contributing to a pension scheme at the minimum level which will not secure them the level of pension they might aspire to - or might expect - at retirement. Once the full programme is complete in 2019, there needs to be a large scale media campaign encouraging individuals to look very critically at their own saving arrangements. This can be done at regular intervals to check if they are on course to get the pension they need or deserve - and be prepared to pay more inI if necessary.

Consumer advice and guidance services need to be more readily available and the value of their functions promoted. The development and availability of the proposed new Pensions Dashboard should be welcomed as a potentially useful aid tool – both for individuals and their advisers.

Fourthly and finally, there is the question of image and general mistrust in the pensions industry.

The industry’s good name and reputation has been, and to some extent remains, tarnished by the various scandals arisen with depressing regularity over the years. The national media can feature stories pertaining to “rip-off fees and charges” on pensions; some of which are justified and some are not. But, be that as it may, this serves to make some consumers suspicious about the industry; affecting their willingness to engage with it.

There is no silver bullet here - it is only by the continued delivery of quality products and a consistently high level of customer service that a better image can be secured and consumer confidence restored.