E is widespread agreement in both government and in business circles that Britain’s pension regime needs urgent reform to make it fit for the long term.
People are not saving enough for retirement and businesses are continuing to struggle to provide adequate pension schemes for their employees. So far, plenty of work has been done to raise awareness. But the debate must now move forward.
Part of the problem is a lack of stability in Britain’s savings framework, which is preventing people from making a long-term commitment. Every year brings new change – investors are now drowning in an alphabet soup of forthcoming regulations. If we want people to save for the distant future, we need regulators and politicians to be committed to the same timeframe.
Cross-party agreement on pensions would also be welcome. Above all, there needs to be a period of stability in government policy. Current schemes and initiatives, like the National Employment Savings Trust (Nest) – the government’s new workplace pension scheme – need time to work through, with no additional changes.
Secondly, we need to raise the general level of financial education. Governments should take a more hard-hitting approach to raising awareness among consumers about the importance of taking personal responsibility for their financial future. Building on the introduction of auto-enrolment pensions last month, the government needs to invest in national campaigns to encourage people to prepare for a retirement that could last as long as their working life.
Technology and product innovation also play a vital role in the future of UK pensions. Technology will enable employers and individuals to monitor, manage, administer and plan. Again, the success of auto-enrolment relies upon the effectiveness of platforms available to employers.
There are signs from the embryonic workplace savings platform market that employees with online access have a higher propensity to choose funds outside of the default option. Indeed default funds, in which typically at least 80 per cent of direct contribution members invest, are not considered fit for purpose across the life of the investment. Many experts think that more active management is needed.
We could also imagine a system similar to the Driving Vehicle Licensing Agency (DVLA) for pensions. When someone moves job, marries or divorces, even if the underlying pension doesn’t move, individuals should only need to update all their schemes in one place. This would simplify the system and keep people engaged in their long-term financial planning. Providers that embrace technology for the benefit of their members will also achieve a competitive advantage.
My vision for the future of private workplace pensions embraces a world in which people will be able to access platforms to construct their own portable pension pot, likely to be a mixture of Isas, company share schemes and pensions. It supports innovation and greater flexibility, recognising that consumers are driving change. The relationship between employers rand their pension partners, providers and advisers will be increasingly important as they address the challenges ahead – ranging from managing auto-enrolment to reviewing investment strategy.
There is undeniable enthusiasm in the pensions industry to resolve these issues. We now need politicians and regulators to provide a firm and stable commitment on behalf of present and future pension investors.
Anne Richards is chief investment officer of Aberdeen Asset Management. This article follows a recent a research study into the UK pensions industry called 250 expert voices: the future of UK pensions.