Auto-enrol for advice?

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‘Auto-enrolment’ into so-called Personal Accounts is probably the most innovative and interesting element of the Government’s proposed pension reforms. But auto-enrolment potentially throws up as many challenges as it solves.

These challenges were the basis of an ILC-UK debate last night, at the Institute of Actuaries – ‘Promoting Inertia: How should the Government sell Personal Accounts and what should its retirement savings message be?’
Auto-enrolment into Personal Accounts will be revolutionary, because it will be the first time in the UK that inertia in financial behaviour – a major cause of under-saving – will actually be used to help individuals save.
With Personal Accounts on offer, what messages should the Government use to sell them to individuals? Keynote speaker Adrian Boulding of the Legal & General had 3 key suggestions for policymakers:
* “Use it or lose it” – encourage individuals to ‘bank’ their employer contribution.
* “Everyone else is doing it” – use the consensus of widespread participation, given that people are usually happier following the crowd.
* “Which type of fund?” – assume individuals are enrolled in Personal Accounts and get them to think about the next-step, instead of withdrawing; or the ‘presumptive close’ as Adrian called it.
Using any of these messages, the Government might succeed in achieving widespread take-up of Personal Accounts. Which is where the problems start. How so? First, given a choice of whether to opt out of Personal Accounts, many employees are likely to display inertia, remaining in the scheme, but believing that they have ‘dealt’ with saving for their retirement. However, for many individuals, Personal Accounts will not be enough to meet their retirement income expectations. The Government will still need individuals to undertake additional saving; that is, to both do nothing and take action. This is where the ‘message’ gets trickier. How will individuals be encouraged to exhibit inertia by remaining enrolled in their Personal Account, while simultaneously being proactive about additional retirement saving? Is there not a clear risk that while Personal Accounts will help those who have previously not saved enough, they may also actually lead individuals with higher rates of saving to shrug off their personal responsibility, with the result that they save less?
Second, Personal Accounts are not suitable for everyone. One of the panellists at the debate, Niki Cleal of the Pensions Policy Institute, talked about research undertaken by her organisation, which analysed those people for whom remaining in Personal Accounts might not actually be the best option. This group might include those on low incomes with a broken employment history, who might therefore lose means-tested benefits. Another group is single people who are likely to rent in retirement, with no additional savings, who may be at risk of losing entitlement to housing welfare support.
One solution to both these problems might be to provide individuals with free, generic but personalised financial advice. It is this sort of approach that was put forward by Sue Regan of the Resolution Foundation, whose organisation has spent the last 18 months lobbying Government to introduce a national free generic financial advice service.
Sue argued that saving still has to be about personal responsibility. This approach flips over the ‘inertia-exploitation’ thinking behind the whole auto-enrolment approach. But so what? Generic but personalised financial advice would be able to encourage individuals to remain in Personal Accounts and undertake additional saving in order to meet their retirement income expectations. In addition, such financial advice could identify and inform those individuals for whom Personal Accounts are not suitable, whether because they would lose means-tested benefits, or they first need to pay off personal debt, or purchase life insurance. An advice service would also be useful with the not inconsiderable challenge of helping individuals enrolled in a Personal Account choose which type of fund to invest in.
The Government is extremely interested in how a national generic financial advice scheme would work, and has just commissioned Otto Thoresen to review the feasibility of such a scheme.
Indeed, what seems to be happening is that the ‘generic advice’ agenda is emerging into the mainstream at just the right time, when the Government is thinking about how to make a success of Personal Accounts. There seems to be a growing consensus that to make Personal Accounts work, generic financial advice is needed. The DWPs Chief Economist, Robert Laslett, also recently put forward the argument that financial advice is key to rolling out Personal Accounts at a conference hosted by the Resolution Foundation.
We are witnessing a rare occurrence: two separate policy reform agendas are interlocking to the benefit of both.
Is that everything? Not quite. Lots of questions do remain about Personal Accounts, not least the tricky issue of compliance. However, as a final topic worth thinking about, our keynote speaker Adrian Boulding put forward a scenario worthy of consideration: those who do not enrol in ‘Personal Accounts’ will become financial ‘lepers’ of the future. Why? No financial adviser will want to go near them. If such an individual approached an adviser to buy some other savings product, such as an ISA, and the adviser did not recommend them to enrol in a Personal Account instead, given an ISA cannot match the employer contribution available in a Personal Account, the adviser might be at risk of future mis-selling litigation.
Many of the answers around Personal Accounts are falling into place, but there’s still some way to go.

James Lloyd

2 thoughts on “Auto-enrol for advice?

  1. Giles Wade said:

    I enjoyed the seminar, and greatly appreciated the clarity of Adrian Boulding’s speach. For me it became very clear that there MUST be promotion of personal accounts – if not we will suffer the expensive disaster of people auto-enrolling, paying a few contributions, then realising their pay is less and opting out.

    And if PAs are to be promoted, there need to be simple messages about them. Mr Boulding gave good clues as to the bases for those messages.

    Sadly, the issue still around is the interaction between the Personal Account System and the Means Tested System. It seems to me that the Personal Account System is being made more and more complicated to ‘fit in’ with the already complicated Means Tested Benefits System. How has the vision for Means Testing changed given the impending advent of Personal Accounts?

    Ideally, I would like to see changes to Means Testing such that the Government can clearly state ‘Save in Personal Accounts and you will not lose out on State Benefits’.

    And there are some interesting philosophical debates ahead (with political implications that may have a bitter taste). For example, if a person has the ability to save in Personal Accounts during their working life, but opts out and does not save in another way, should they be eligible for means tested benefits in retirement?


  2. Pauline Armitage said:

    I sense another disaster looming if Personal Accounts are introduced as currently proposed. Plenty of precedent for that alas in pension circles! I’ve just looked at the PPI briefing on the PADAB and the Institute’s response to the White Paper and see a huge, expensive organisation coming into being, hiring staff, writing lots of rules, sounding important and complicated. I wish someone would convince me we haven’t lost sight of the main goal. Do pensions experts understand how ‘ordinary’ people think or behave?

    Giles, I agree entirely with your comments about the difficulties of combining personal savings accounts with the current means tested allowance system. I believe the two are incompatible.

    Looking at the problem simply, the BSP is not enough to guarantee a decent standard of living. A BSP for everyone at Pension Credit level cannot be afforded. We want individuals to save something for their own retirements where they can, rather than relying on means tested allowances where the cost falls on the next generation of taxpayers.

    Should we not concentrate on encouraging savings which will produce a retirement income at Pension Credit level, and leave ‘extra’ saving to the well developed pensions industry? Why duplicate things?

    Everyone who is ineligible for means tested benefits (Pensions Credit) has some savings or some income over and above BSP, so they have already made some provision. Given a bit more incentive they might be persuaded to use the same vehicle and save a bit more. It is the people who qualify for means tested benefits who are of concern. The poor will always need state assistance of course, but will non-savers who could afford to save just a little be well served by Personal Accounts? Given that an employee will be funding half of any future pension himself (4% out of 8%) and that with no saving he’d qualify for full Pensions Credit, I can’t see that ‘best advice’ would be to remain opted in unless projected pension were to be more than twice Pension Credit level. And if we are realistic and accept that the employer’s extra costs will be passed on in restricted pay rises etc, we may need to assume an employee will be funding up to 7/8 of any Personal Accounts pension.

    The middle band of earners have only one thing in common: they could save something for their own retirement if they chose to. A successful scheme to promote retirement savings should draw contributions from the whole of this band. Yet, as Giles Wade points out, people could opt out, spend everything and still claim state help. (There are millions of people who smoke, eat to obesity and overtake on blind corners despite knowing the risks. What makes us think people who currently decide not to save will curtail spending to save for their retirements just because we tell them it’s a Good Thing?)

    Before Personal Accounts are even introduced we are ducking and weaving, suggesting all manner of adjustments to try and avoid the problems they will cause. Shouldn’t this make us stop and wonder if we’re on the right track? The idea of providing accurate yet generic advice to millions of low-earning employees is risible. There are so many variables that best advice could never be anything more than a reasonable assumption for many people. For most of the people Personal Accounts were intended to help, the financially sensible (though morally questionable) advice will be to opt out and claim state help.

    The only solution I can see, unpalatable though it may be, is that everyone must be compelled to contribute to a small limited scheme which will provide benefits equal to Pension Credit levels, unless they are members of an pension scheme providing at least the same guarantee. Unfortunately this option seems to have been considered and shied away from at the outset.

    Forget complicated new accounts, personal financial advice, investment decisions and the whole costly machinery that is starting to turn…use the system already in place. Suppose we put NICs up by 5% and pay this to an earmarked personal NI savings account guaranteed by the government to grow in line with NAE. Hone contributions so that an acceptable proportion of earners would at retirement have contributed enough to this personal NI savings account to guarantee a state annuity on top of BSP sufficient to obviate any future need to fall back on means tested benefits. Return excess as tax-free cash or convert into extra pension. Those for whom the personal NI account was insufficient would get the extra pension anyway, in much the same way as means tested allowances are given. But they would at least have contributed something according to their income over their working lifetime.

    Package it to sell.

    …but it’s too simple, boring, just a super BSP/SERPS really, and (ouch!) it won’t provide the financial sector with any extra employment.

    Any brave politicians around?


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