There is no doubt automatic enrolment has been a massive success. It has turned us from a nation of non-savers, to one that is storing at least some money away for retirement. But that doesn’t mean the UK’s pension problems have completely disappeared.
Many more people may be saving for retirement, but not all of them are engaged with their saving or saving enough to provide a decent income in later life. With the responsibility of saving still mainly falling on the individual, they need help in making better decisions about how much to pay in, but also how to take money out of their pension in the best way possible.
An essential part of this is understanding their starting position – how much pension have they built up so far.
The Department for Work and Pensions (DWP) has been considering how to tackle this. It is championing three different initiatives in 2021 which will, it hopes, help automatically-enrolled members understand the value of all their pension pots and the collective income they can look forward to once they retire.
The three initiatives are:
- Simpler statements: The DWP wants automatic enrolment schemes to cut out the bumf from annual statements and instead issue one that is only a couple of pages long. The aim is to give the member just the key information up front, in an easy-to-understand format, using jargon-free terms. However, the DWP backtracked slightly from its original puritanical stance and instead will allow schemes to add in – or link to – supplementary and personalised information. The new style statements will include a line on costs and charges.
The DWP will soon consult on what these statements could look like, and final rules are expected in 2021.
- Pensions Dashboards: The evolution of pensions dashboards – in various forms – has long been anticipated. But at last we seem to be moving towards launch. The Pensions Dashboards Programme has published its first stab at what data schemes will need to provide. This centres around an estimated retirement income, although schemes can also provide an up-to-date fund value as well.
One of the major challenges for some schemes is making sure they recognise the right member and give the information to the right person. In a GDPR world, it’s obviously critical they get over this hurdle.
Pension schemes will have to start giving information to the dashboards ahead of the go-live date of 2023.
- Consolidation of smaller pots: One of the fall-outs from automatic enrolment is the number of small pension pots that automatically-enrolled members will build up with one employer and then discard when they swap jobs. The Pension Policy Institute (PPI) estimates there are currently 8m small pots – 75% of which are worth less than £1,000 – and this will surge to 27m by 2035. The DWP wants to come up with a way of consolidating these pots giving members a clearer view of their pension wealth, as well as reducing costs for schemes and the members they pass the costs onto.
But it hasn’t yet decided the best approach. It wants the industry to set up trials in 2021 to test the feasibility of its two favourite solutions, both of which are based on automatically consolidating pots without getting the member’s consent.
These three initiatives are probably quite limited on their own, and the success of each is entwined and dependent (to some degree) on the other two. But taken together they could really help automatically-enrolled members understand what pension benefits they have so far built up.
All three need schemes to hold excellent data standards; the dashboard and consolidation projects need schemes to have the ability to identify the right member before they can either provide information online or automatically consolidate pensions; and the simpler statements and dashboard want schemes to present the right information in the right format to members to engage and nudge them to take better saving decisions.
Getting all schemes’ data ship shape so they are in the right position to feed into these initiatives could be a massive task. And there will no doubt be many bumps to navigate along the way.
These initiatives could have the power to change pension comprehension, engagement and planning. But although they are aimed at automatically-enrolled members, they will deliver this for a much wider audience. Most people are at some time going to be automatically enrolled and will receive these simpler statements, or have their small pension pots consolidated without their consent, or be pushed towards a dashboard.
Having a better idea of what pension wealth they have and the retirement income it may produce should push people to consider how much more they need to save. This in turn could lead them to seeking regulated advice to help them achieve their retirement aims.
Rachel Vahey is senior technical consultant at AJ Bell