By Tom Murray, Head of Product Strategy LifePlus Solutions, Majesco.
Promoted by governments who are facing ever increasing bills for stepping into the breach for individuals and are looking for ways to make their citizens less dependent upon the ever-shrinking taxpayer base.
Over the centuries, people depended upon the largesse of the landed gentry to look after them in their old-age, and as only a few ever fell into this category, this wasn’t an excessive burden. Post the industrial revolution, the larger employers stepped in, providing generous defined benefit pension schemes that promised to secure the future of those who worked for them. In partnership, the state took responsibility for public servants and those who fell outside the net of the larger employers.
However, dramatic changes in longevity, meant that companies started to shut down their DB schemes as the liabilities associated with them weighed excessively on their balance sheets. This meant that future projections showed a huge increase in the responsibility of government for supporting those in old age and an unsustainable concomitant increase in the costs. Combine this with a declining population and the corresponding decline in tax revenues and the warning lights were flashing a very bright red.
Enter stage left, a strong push by governments to establish a sense of personal responsibility in the population for their own financial well-being. Self-sufficiency in the financial arena has become the watchword for the powers that be and to that end, behavioural psychology has been drafted in to ensure that there was a large increase in the number of people that were saving for their own post-retirement future. Based on that, auto-enrolment policy was launched to nudge (push) people into saving. To date, it has been a huge success in terms of engagement, with millions of extra people now saving for their retirement.
Where it hasn’t been so successful is that the amount being saved is not sufficient to make a major difference in retirement, and that some of the government’s other policies such as pension freedom are not working in tandem with it. If this was our heroic Good family, it would mean that they were about to starve in the final half of the year, as the allotment just isn’t yielding enough to support them.
So, encouraging people to save much more is necessary in order to ensure the effectiveness of the policy. But while the road to be taken is clear, is the vehicle being provided the right one? Are we correct to focus on security in old age as a stand-alone rather than think of whole-of-life savings as being the goal?
One of the key difficulties in getting the general population to save is that there has always been a difficulty in making people focus on their old age. Most people do tend to believe that they will never grow old, and therefore the problems that will surface in their 80s don’t seem real.
Therefore, people did not have to be nudged to save in Individual Savings Accounts (ISAs). The tax effectiveness of the ISA approach is obvious, and the benefits can be availed of soon enough to make their value seem real to the saver. Similarly, the benefits associated with the latest addition to the stable, the Lifetime ISA, with its ability to be accessed to pay for the deposit on a property, is the kind of goal that young people in their twenties can focus on.
Yet the auto-enrolment process is driving people to put whatever money they have into their pension savings. And the problem with pension savings is that they don’t help with any of the issues that might arise in the course of one’s working life. If someone has general ill-health or loses his or her job, then that person could be in the slightly bizarre position of having substantial pension savings yet being unable to access them to remain in their current home or to get the level of medical treatment they require.
Maybe if we want to breed self-sufficiency post-retirement, we need to start looking at self-sufficiency pre-retirement. The incentives that are aimed at pension savings should be aimed at life-long savings. We should be auto-enrolling into tax-incentivised, life-long, which can be drawn down for major life events such as the purchasing of a first property, or unexpected events like a loss of income through unemployment or ill-health as well as for pension purposes.
It is far easier to incentivise people for visible possibilities like these, rather than the over-the-horizon event of retirement, and that would make it easier to drive much higher levels of savings through the auto-enrolment approach. The benefits to the state are obvious – the higher the level of self-sufficiency, the more-affordable the Government will find it to support those whose circumstance mean that they have no option other than to rely on themselves. And that could mean we would all end up living the good life.
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