This is a crucial moment for retirement saving in this country. People across the economies of the West are living longer than ever before and, rather than planning for this, they are spending not saving – a situation made worse by the economic crisis. Lack of confidence in pensions and downward pressure on annuity rates are compounding the problem.
However, we are fortunate in this country to have grasped the nettle with auto-enrolment and have a committed and knowledgeable Pensions Minister overseeing it.
Private pensions can be seen from two perspectives. The first that private pensions are a social utility and part of government policy; the second that pension saving is a personal responsibility and a commercial purchase like any other.
The answer, in an era of auto-enrolment and compulsion on employers to offer a pension scheme, is somewhere in-between. Historically, we have had two private pension systems in the UK, “trust-based” and “contract” pensions, but both face the same key issues – people need to save more money and save for longer. There is no magic solution other than for people to spend less and save more.
This is why it is so crucial to make auto-enrolment a success. However, simply convincing people to stay opted-in to their auto-enrolled pension is only part of the answer.
The “small pots” initiative announced by the government is an important change, with the intention that people will be able to take their pension pot with them when they move jobs. This will mean it should be easier for them to keep track of their pension pot, watch it grow and benefit from economies of scale as it does so.
There is no magic solution other than for people to spend less and save more
Our new open market option code means that consumers are given the information and encouragement they need to shop around for an annuity at retirement to take advantage of the best terms on offer for them.
The industry knows it must do all it can to continue to improve standards. The recent debate around so-called “hidden costs” in pensions is one example. The industry understands the need for transparency and is committed to ensuring that consumers understand how their pensions work so that they can judge if they are getting value for money.
This is why we have asked the Pensions Regulator and the Financial Services Authority to work with the industry to develop an industry protocol to ensure that, regardless of whether a pension is contract-based or trust-based, consumers receive the same information about the charges and costs that are part of their pension.
However, no amount of technical improvement around transparency and service will remove the fundamental need for people to save more and for longer, to ensure they have the quality of life in retirement that they want – this is the single most important factor to the outcome at retirement. If the improvements are successful, it is likely that more people will see that their pension is working for them, and will continue to save and build their retirement funds over their working lives.
The industry is playing an important part in encouraging people to think about their retirement planning by raising standards. Charges have been consistently falling for some years and communication to customers has dramatically improved.
The challenge now is to reaffirm our commitment across the industry and across political parties to make pensions work for employees in challenging economic times. The debate around pensions needs to be less of a political football and more focused on using 2012 as a catalyst for the successful delivery of a new pensions framework for the future.
Otto Thoresen joined the Association of British Insurers as director general in April 2011 from AEGON UK, where he was chief executive; he is chairman of the Personal Finance Education Group, an adviser to the board of Citizens Advice Edinburgh and a member of the Consumer Credit Counselling Service Board.
