Most people in government or in the pensions business are pretty convinced that we are in the midst of a nightmarish pensions crisis. How can we make people save more? How can we make them engage with the savings they do have? What can we do to make them care?
There are all sorts of answers out there to this. But look a little more closely and it isn’t 100% clear that there is a crisis in the accumulation part of the pension cycle.
There is a generation that is caught between the twin miseries of not getting a defined benefit pension and being too old for auto-enrolment to provide for them (that’s mine – people in their 40s). But many older people will have defined benefit pensions, where the deficit problem is beginning to melt away, and most working people are now in auto-enrolment.
If those people work on the UK’s average wage for 45 years and get a return of 5% a year, they will, thanks to the miracle of compounding, end up with a pot of around £230,000 in today’s money to add to their state pension when they retire in their mid-60s.
That’s fine, particularly as most people will probably work into their seventies one way or another and it assumes that auto-enrolment contributions don’t go up (which they probably will).
It would be nice, of course, if everyone still got to have public sector-style defined benefit pensions – an inflation-linked income for life paid by your employer. But failing that, and it has failed, the new auto-enrolment system is a good one.
People are now saving and that’s a good thing
Engagement is an issue, but not an insurmountable one. At a debate I chaired in Edinburgh for the Institute of Chartered Accountants in Scotland (Icas), Claire Reilly of PensionBee, a retirement adviser, pointed out that an easy way for providers to engage people would be to sort out their technology. She says everyone has to carry a “dusty file” of boring and mostly incomprehensible papers with them every time they move house. Their pension providers communicate with them only by post. And people “hate post”.
Other financial services come in an app that tells them all they need to know with one tap. Pension information should, too, and preferably in one that includes all their other financial information. Pensions should not exist in a scary hinterland unconnected to the rest of everyone’s finances. There is a way to go on this but she is right – and this will happen, data concerns allowing.
That’s not to say that there isn’t a problem. Just that it might be at the other end of the pensions cycle, in the decumulation bit.
At the Icas debate, my panel didn’t agree on much, but one thing they were clear on was that accumulation is the simple part. Everyone has the same aim when accumulating – to get as much as possible. But decumulation – using the money to get through retirement – is a different matter altogether.
People have different aims. Some want to produce a long-term income, some to preserve capital and some to create an inheritance. How, then, is everyone going to manage the spending of their £230,000 through the 20 or 30 years of their retirement? The risk is that without simply understood and simply marketed products to help them through the financial mire, they don’t manage it but, in a massive missing of the point of the accumulation part, mostly hoard it instead through a mixture of fear, confusion and excess frugality.
But they’re not spending it
That at least is one worry to be drawn from what data we have on how pensioners deal with wealth. This week the Institute for Fiscal Studies produced a report suggesting that they don’t like spending it. They don’t move house to release capital; they don’t sell second homes; and by the age of 90 they are still holding most of the capital they started with (between 70 and 90 they spend about 30% of it).
A review of retirement outcomes in 2017 by the Financial Conduct Authority suggests something similar. Only a quarter of pension pots fully withdrawn under pension freedom have been spent and the rest has been reinvested. No squandering here.
This frugality isn’t just a UK thing: the same thing is happening in the US. According to the Employee Benefit Research Institute, American retirees, instead of spending too much in retirement and ending up destitute, spend rather too little: those with $500,000 saved on retirement had spent only 12% of it after 20 years.
Greedy heirs might think this doesn’t matter: the less spent the more inherited. The rest of us of us won’t be so sure. We would, I suspect, prefer that our pensioners had the retirement they worked so hard for. Our economy could also do with the spending power.
So how do we make that happen? How do we push our pensioners a little closer to dying broke, which is surely the ideal? The answer lies firmly with the financial industry. No one wants an annuity any more – only one in ten people say they like the idea – but most people like the idea of a product that gives them some control over their capital and a guaranteed income of some sort.
Lots of firms are working on it. There are guaranteed drawdown products aplenty and Smart Pension and L&G are developing a more complex “pathway” that covers all bases. There’s drawdown to the age of 80, an annuity after that and a “rainy day” pot for emergencies.
We aren’t there yet. I haven’t seen a product I’d want to provide for my decumulation days. But at least the problem is recognised by everyone from the Financial Conduct Authority to the providers. Our pensioners need help so that they can be confident in spending.
So, just as with accumulation, we will get there in the end. In the meantime, if you think you might be a hoarding pensioner, it might be time for you to stop, rethink – and spend. If you don’t, what was the point of the saving?
• This article was first published in the Financial Times