Membership of private pension schemes falls to record low
Less than 3 million in workplace pensions for first time ever

by Dr. Ros Altmann

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• As auto-enrolment starts, pensions trust and confidence has never been lower
• Without state pension reform, it is dangerous to lure workers into pensions without risk warnings

Latest data just released by the Office for National Statistics highlights the ongoing crisis in UK pension provision. For the first time since records began, in 1953, fewer than 3 million private sector workers are contributing to an occupational pension scheme.

This reflects the below factors.

Affordability: In difficult economic times, some workers may feel that they cannot afford to contribute to a pension scheme, because they need all their spare money to live.

Complexity: Most people do not understand pensions and find them complex and confusing. In fact, the UK pension system is the most complex in the world, comprising many different bits of pension which almost nobody understands. Even leaving aside the difficulties of choosing good investment options, the pensions industry is full of jargon that most mere mortals have little hope of understanding. ‘Default funds’, ‘trivial commutation’, defined contribution, annuities – all these terms mean nothing to most people.

Confidence and trust: This reflects a fall in trust and confidence in pensions across the country.

Inflexibility of pensions for those with debts and no house: Many workers, especially younger age groups, are no longer automatically drawn to save in a pension scheme. Some have large debts and would prefer to pay those back first. Some want to save for a first home, but if they put the money into a pension fund they cannot get it back till later life.

Disappointment of people retiring now whose pension is not paying what they expected: Others have seen their parents save in a pension fund and end up being disappointed as their pension income has been well below what they were led to expect due to high charges and low investment returns.

Record low annuity rates: In addition, recent dramatic falls in annuity rates and drawdown income have left many pensioners receiving much poorer value for their pension savings than ever before. As inflation has increased they also have no protection against rising prices.

Mass means-testing in state pension system undermines suitability of private pensions: Many low earners may also have realised that the state pension system itself undermines private pension saving, since Pension Credit (which nearly half of pensioners are entitled to) can take away much or all of their private pension income.

ISAs more popular than pensions: Low earners at risk of ending up on Pension Credit may be better saving in an ISA than in a pension, although it is very difficult to know what their entitlements will be in future. This uncertainty is bound to make people think twice before contributing their hard-earned money into a pension fund they cannot touch for decades. Indeed, contributions to ISAs in the past couple of years have exceeded pension contributions in the private sector.

Trust damaged by so many pension scandals: After so many scandals surrounding pensions (excessive charges, Equitable Life, mis-selling, occupational scheme wind-ups) people no longer have the same faith in pensions as previous generations seem to have done.

Auto-enrolment will increase numbers in private sector pensions: The situation is about to change, as millions of workers are about to be automatically enrolled into a workplace pension scheme starting next month. This is bound to mean that increasing numbers of workers will belong to pension funds over the coming years.

How many will stay in and how many will opt out? What is not clear, however, is how many of those auto-enrolled will choose to opt out, rather than staying in. The figures released today suggest that many workers who have already been offered company pension schemes are voting with their pockets and choosing not to bother with pensions.

Without radical state pension reform, many workers should not belong to a pension scheme: It is possible to argue that, with the current state pension system, many low earners are absolutely right not to join a pension scheme. News recently that the Government may be having ‘cold feet’ about introducing a new, flat-rate £140pw State Pension, to overcome the problems of mass-means-testing in the state system, is deeply worrying.

Workers should be given risk-warnings if they are at risk of losing much or all their pension: If the state pension reforms do not go ahead, it will be disingenuous for people to promote pension scheme membership to low earners at risk of losing their private pension in retirement means-tests. Of course, if we do provide risk warnings, then many of the target group will opt out. Far better to make saving safe, rather than luring people into pension schemes that may not be suitable for them.

Auto-enrolment should be about encouraging saving, not just selling pension products: If people are not keen on pensions, that does not mean they should not save. There are other valid forms of saving that we need to encourage – such as repaying student debt, or saving to buy a house. The problem with the current situation is that if people are not happy to lock their money into the ‘locked box’ inflexible pension product, they lose their employer contribution and tax relief. But if we can encourage them to save, in whatever form, we will have started to help restore the savings culture that has been dwindling in recent years. Policy seems to believe that, when it comes to encouraging workplace savings, it has to be pensions or nothing. That will leave many with nothing.

Pensions may be past their sell-by date: With private sector occupational pension saving at record lows, we can try to force people back into the pension product, or we can try to recognise the need to give pensions an image make-over.
More flexibility, less complexity and a state pension system that does not undermine private savings would be a great start. Policymakers should listen to the people and make pensions more user-friendly if we really want to revolutionise long-term saving.

There are several policies that could address these problems:

1. Re-name pensions: The word ‘pension’ has some negative connotations. We could consider a different name for the private pension, with only the payments received from the State via National Insurance being called ‘pensions’. Your own savings for later life could be called something new. For example, ‘Lifetime Funding’, ‘Tomorrow’s Money’, ‘More for Later’…. suggestions welcome!
2. Make pensions more exciting: Pensions offer nothing to people until much later in life. If one could find a way to offer something sooner, or even the chance of some money sooner, people may be more keen to contribute. For example, a lottery where each month someone who contributed to a pension scheme could win £1million might capture their imagination.
3. More flexibility: Younger people are not drawn to the idea of putting money into a savings product and then not being able to touch it again for decades. Allowing people to access some of their money, either freely or with restrictions, would be far less frightening to those who are worried about what their future holds.
4. Only lock in the employer contribution and tax relief: It would be possible to design a system where the individual could access their own money, either freely or only for certain uses such as paying back debt or buying a home, while the employer contribution and tax relief must stay in the pension product until later life.
5. Radical state pension reform to get rid of mass means-testing: It is essential that we make it safe for people to save in a pension fund, if we are automatically enrolling them into the product. So, either we must change the way the state benefit system works to allow them to keep their private pension income, or we must warn them fairly of the risks that they may be better saving in a different form. The risk of pension mis-selling, or mis-buying, in the current system is a real danger for the future.

In conclusion, these figures showing that pension contributions have plunged to record-low levels should provide a wake-up call to the pensions industry and policymakers that we need to be more in tune with what people want and need, rather than sticking to the old-fashioned ways that may suit the industry best, but may end up being poor value for the workers contributing their hard-earned money every month.