There's been a lot of discussion about personal accounts in the last few weeks. In mid-June the DWP issued its statement on the responses it received to the White Paper consultation earlier this year, and took the opportunity of making some decisions on the structure of pensions reform and personal accounts. It also took the opportunity of flagging a lot more decisions that would fall to the delivery authority to take.
So the mechanics of pensions reform and personal accounts is slowly coming together. But having the right structure in place (if indeed this is the right structure – and there’s a lot of debate about that) doesn’t add up to us having a ‘magic wand’ to make sure more people are saving more money for their retirement.
Instead, so far in this debate, we haven’t paid enough attention to the other big challenge – changing the culture surrounding saving in the UK. This is as big an argument as making sure we have the right products.
The Government is putting a lot of reliance on auto-enrolment. And there is no doubt that will increase saving in general terms. But we can’t simply rely on the apathetic approach. Instead, we need to make sure more people are taking active decisions as well – for example choosing not to opt out, or to increase their contribution rates when they can. To do this we need to look much closer at the target market for personal accounts.
Analysis of research from Deloitte shows people in the target market have been saving an average of £1,600 a year, just under 9% of average income. But what will these people do when they are auto-enrolled in a pension? Will they simply switch these savings to the pension scheme? If so, they won’t be saving more for their retirement, they will be saving the same. And what about those who are not currently saving? Will they just opt out?
The savings culture in the UK seems to be floundering. AEGON found in its recent wave of IFAs Insight research that almost 8 out of 10 IFAs agreed people tend to have spent their money before they have it. And two thirds thought people are no longer saving for a ‘rainy day’ and they have noticed the general level of savings decrease in recent years. This is not good news.
We need to not only provide the mechanism to save, we need to change hearts and minds, and the culture surrounding saving. The Government and the delivery authority need to start thinking about this, and quick.
Rachel Vahey is head of pensions development at Aegon Scottish Equitable
The views expressed in this blog are those of the individual and not necessarily the company she represents.
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