By Dale Critchley, Policy Manager, Aviva
The clear focus is on the here and now, making sure your family is looked after today, while everything else can wait. It’s hyperbolic discounting gone into over-drive - if it’s something for now, then it has value, if it’s something in the future it can join the line behind more pressing priorities.
So where does that leave pension contributions? Do they still class as “essential items” when it comes to our monthly expenditure?
I think it’s fair to say it’s a mixed message from government and the regulator. While the ultimate step of allowing a contribution holiday from automatic enrolment contributions wasn’t taken, there’s been a clear signal to those employers having to put employees on furlough - anything above automatic enrolment minimum contributions can be considered non-essential, This is after businesses were told they could reduce pension contributions to the lowest, legal level.
At the same time, defined benefit scheme trustees have been encouraged to consider contribution holidays, at least in terms of deficit recovery payments, as cash becomes the most precious commodity in a business.
All of this makes sense of course. Corporate income in some cases is at zero, furloughed workers may only be receiving 80% of pay and those who are self-employed may have to survive of savings or a job in a supermarket until June.
For most commodities supply and demand will ensure that post Covid-19 values will get back to normal - oil won’t be worthless for long. We have to make sure the same happens with pension contributions. The fact that the regulator only relaxed consultation requirements in respect of a temporary change means there will be a regulatory imperative for employer contributions to return to normal.
When it comes to individual decisions around pensions, I think we’ll see an inevitable lag as human nature comes into play. Loss aversion and procrastination will need to be overcome through careful communication to get people saving again.
Re-enrolment will ultimately pick up workplace savers who choose to stop contributing, but a period of three or more years could have passed before that happens. We need to make sure that the immediate need for a pause in contributions doesn’t turn into an unbridgeable gap in pension saving.
The Coronavirus has also shown us the positive side of pensions, which should reinforce their value.
Although pensioners have been impacted most in terms of the threat to their health, they’ve probably suffered least in terms of their income. Pension incomes from annuities and defined benefit pension schemes have continued to be paid. The value of saving to provide a pension income, and a guarantee, is there to see, even if it’s been masked by the immediate issues facing the recipients.
The value of advice too has probably risen, although it may be less obvious. Those pensioners in drawdown who have been well advised and have a portfolio and disinvestment strategy designed to withstand short term downturns may be reflecting on the wisdom of their decision.
The lasting effect of the crisis might well be positive for the value of pensions as we get back to ‘normal’ and reflect on what’s actually going to be valuable in the future.
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