Getting workers automatically saving for the future will be pointless without education, argues Charles Goodman, as people have to understand their spending to provide a context and realism to their retirement aims and needs.
There is nothing I hate more than those few seconds before sticking my hand up to ask a question. I remember sitting at the CII in London listening to Steve Webb, the then pensions minister, talking about his plans for auto-enrolment. He issued a ‘call to arms’ to the assembled adviser folk to help design a new way to ensure good retirement outcomes for members. Then he opened the floor to questions.
My question to Steve was this – rather than simply nudging people vaguely in the right direction, wouldn’t it be better to educate them so they understood why such things were important and not just another tax?
Automatic enrolment owes part of its conception not just to our Aussie cousins’ ‘Superannuation’ but also to the theory of ‘Nudge’, brought to us in book format by Thaler and Sunstein and turned into a governmental department by the coalition in 2010.
As Steve had been talking about creating default retirement paths to meet future demand, I recollected reading the book. The introduction begins with an explanation of how placing various foods in certain places in a school cafeteria could get pupils to make better nutritional choices for their lunch.
To me, it sounds like a good way of getting kids to eat the right food – although perhaps we should remove the temptation of bad food in the first place. But is it really appropriate in the context of pensions and financial wellbeing?
After all, it’s not just about saving enough for retirement – it’s about understanding the appropriate investment to be in, the best provider, the trade between quality and charges, the right income level, the understanding of how other assets fit in, how other products might complement, and what the taxation and inheritance position might be.
Anyway, back to the floor.
Ever charming, Steve smiled and retorted with an amusing anecdote that successive governments had tried education with stop smoking campaigns and there was little evidence, on review, that this had much impact on the choices people made when compared with the cost to the government. Some of the crowd politely chuckled and, feeling the corner of a pack of Marlboro’s sticking into my side, I may have smiled too.
The problem with question and answer sessions, as politicians regularly find in Prime Minister’s Questions, is that you tend to get just one question and no chance of reply to the answer. Ironically this piece is now giving me the chance to get the last word that Steve thought he had had back in 2014. That is, of course, unless you’re reading Steve …
So what would I have said in reply to him?
First, I believe education gives people a choice. If they choose not to listen, well that’s their decision and it’s reasonable to expect they should accept responsibility for the consequences. If they weren’t educated about their options in the first place, then there’s no choice. They are trapped by their ignorance and, surely, it would be unfair to blame them for the consequences of their action or lack thereof.
So how does this fit into auto-enrolment? Well, the obvious and largest warning sign is that we already know, as an industry, that one per cent from the employee and one per cent from the employer is not going to get people anywhere near the retirement expectations they have. Yet this isn’t stressed anywhere.
Even if we consider the now delayed 2019 contribution rise to five per cent from the employee and three per cent from the employer, a total of eight per cent a year is barely likely to cover the cost of an annual holiday, let alone the sort of retirement their parents and grandparents are enjoying.
The government – perhaps not taking the realities of this low-level of saving seriously enough – even allowed an opt-out clause.
Murmurings of mutiny
So far, the one per cent rate has not been a problem but, having sat in pension meetings with employees for the past five years, talk of contributions rising to five per cent leads to murmurings of mutiny. Employees simply do not appear to feel they can afford the increase.
Despite growing economic pressures, it seems unlikely that, other than in a minority of cases, they truly face outgoings of 95% or more of their salaries. Either people feel they do not have not enough surplus to feel comfortable committing five per cent of their income – which for three per cent additional salary from their employer seems illogical – or they simply do not understand the benefit to them of committing that spare cash if it is lying around.
And if expenditure really does account for 95% or more of their income, this is an issue that needs to be addressed now – not left until they are potentially too infirm to be able to produce an income to match it.
Many of us are fighting to reduce investment charges and work on better investment and income solutions but, even if we succeed, those boosts alone are not going to replace such significant shortfalls.
The problem will not be solved just by getting workers automatically saving for the future – not, at least, without first helping them to understand their spending, to provide a context and realism to their retirement aims and needs. The current status quo will only lead to disappointment and anger. This isn’t a silver bullet.
Many companies are recognising financial education is vital to ensure their employees can retire and are providing it, but many will not – or will not be able to afford it. These are the people we need to figure out how to reach as an industry. We cannot let this happen, just as our profession reaches hard-earned respectability.
And you know what? I like to think Steve Webb actually took on board my question. Only a few weeks later, in August 2014, the government announced plans to introduce financial education into the maths and citizenship curriculums.
That is certainly a step in the right direction for the future, but it is in all our interests to fill in the gaps in the present.
Charles Goodman is an employee benefits consultant at Mattioli Woods