‘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. http://www.pensionspolicyinstitute.org.uk/news.asp?p=251&s=2&a=0
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. http://www.hm-treasury.gov.uk/independent_reviews/thoresen_review/thoresenreview_index.cfm
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.