In the second part of Retirement Planner's auto-enrolment discussion, Helen Morrissey looks at whether current auto-enrolment contribution levels are enough to deliver decent retirement outcomes.
Helen Morrissey, editor, Retirement Planner
Rags Bram, senior financial planner, Redbourne Wealth Management
Robert Cochran, pensions development manager, Scottish Widows
Lee Gardner, IFA, Gardner Independent
Simon Roberts, IFA, Foinaven Asset Management
Paul Taylor, CEO, McCarthy Taylor
Tim Veiro, financial adviser, Charles Derby
The people around this table know current auto-enrolment contribution levels are nowhere high enough to give you a decent retirement income. Whether the general public recognises that is a very different matter. What is your view?
Simon Roberts: I think most people recognise that fact, but there is still a reluctance to increase it above whatever they can get from their employer. But you do get the two camps: you get those who absolutely love it and they will willingly write you a big cheque, and then there are the other people who say: "No, I'd rather go and buy property."
Paul Taylor: One of the failings of auto-enrolment is the flat approach. In my view, the amount that the employer and the employee should be contributing should be scaled according to age.
We all know that when you are young and you're trying to buy your first house, the last thing you want is to put loads of money into a pension. When you are older, you can afford to make a bigger contribution.
Roberts: We need assistance in the marketing of it all. I've spent a long time talking to employers about auto-enrolment and accountants and payroll providers about how we can assist them. They've stood up at the end and said: "Thank you very much indeed," and not done anything.
You can't send them an invoice for that time. It is an education service and I don't think we are being helped by the outside influences that could assist us in marketing the good things about pensions.
Robert Cochran: I wanted to talk about the problem of outcomes. One of the big things is the expectation gap. We do research every year looking at what people think about retirement. So the average age a British worker wants to retire at is 66 years old and on an income level of £25,000 a year.
Auto-enrolment is not going to deliver that for the vast majority. When we do our survey, we assume that 12% is a decent level as long as you keep that 12% for the duration of your working life. It's getting these kinds of messages over to people.
They also completely underestimate their life expectancy – they think they're going to die much earlier than they will die and that's where I see a risk of them not annuitising to any extent and potentially running out of money.
Tim Veiro: Can I ask you, Lee, your strategy is very similar to the Charles Derby strategy. We're looking to gain access to the employees, but how are you getting results?
Gardner: We have had tremendous leads. I spent a day with one employer. I did about six or seven small seminars. We've potentially got just on that first meeting at least 20 potential pension pots to look at. But on an ongoing basis where we've put a service plan in place for the employer, I'm not sure if that service plan is enough to cover servicing 100 individual members.
Veiro: Can you not charge advice fees for the individuals?
Gardner: Well, obviously we can, but I think that's where it comes down to the perception and this is again an educational piece. You've got a chap earning £25,000, £30,000 a year – things are very tight for people, so you might say £10, £15, £20 a month isn't a lot of money, but it is for some of these people.
What lessons can we learn from countries such as Australia that have already been through auto-enrolment?
Cochran: Australia started at 3% or 4% employer contribution dependent on the size of the employer and, over a ten-year period, rose to 9% for all employers.
It stayed at 9% for ten years and, as of last year, has started on a journey to 12% as the standard contribution level. Twelve per cent is the figure we use in our pension savings report as the level at which you have a good pension.
There is a much greater level of engagement in Australia – people talking about how much they have in their 'super' and where it is invested is pretty common. They see it as their savings and the funds are getting bigger.
The average super balance for a man age 55 is more than £70,000, but expected to grow very quickly as the extra years' contributions continue to rack up, so they're much more engaged. That will happen in this country as well as more people get more money going into a pension pot.
We started at 1% and 1%, and while I can see why we did it, I do worry it sends out the wrong message because by the time you get to 8% it feels like that is a huge amount. It is still nowhere near where you need to be for a comfortable retirement.
They are much further on in places like Australia – they didn't have opt-outs over there. But then they didn't have fixed protection and all the rest of that stuff, which is the reason why we need it over here.
Rags Bram: I also think if you look at the Australian model, I think there was much less government – or their equivalent – meddling in pension rules. For us, I think that's what we need now.
Cochran: It's interesting to see how [pensions minister] Steve Webb recently addressed the issue of 8% contributions. We haven't got to 8%, but he's already acknowledging that future government is going to have to deal it.
It isn't enough. The government knows it's not enough. The trade unions know it's not enough. Everybody knows it's not enough, but we haven't even got to that point yet and they're already talking about who's going to bite the bullet and get to the next level. We undoubtedly do need a period of stability in legislation, and right now we have anything but.
Taylor: Absolutely. We need generic examples, if you like. For people of certain ages, this is how much you'll get if you contribute this amount. That to me is an effective countermeasure to the fact that they will see small amounts going in and they need to realise they've got to put more in in order to get to where they want to get to. The difficulty is that the new state pension is being heralded as if it's going to be an adequate pension for all, and that's something else that we need to tackle because it won't be.
Gardner: It comes back to the need for education and we need to get it across that people need to be funded adequately for their retirement. I'd still like to see a little bit more effort put in from other quarters to get stuff out there because there is only so much you can do as an IFA. From a much higher level, there needs to be much more communication to get people engaged.
Taylor: But lobby your MP! You know, if we all do something, it eventually will have an impact and the media is interested in this subject. I mean, we shouldn't lose sight of that. They have slammed pensions quite aggressively over the past few years, but they are looking at the way things need to develop.
Cochran: What we do as an organisation is try and influence exactly this debate publicly. One of the ways that we did that was going to the House of Commons and speaking to researchers and the MPs about exactly what we're talking about. What is the point of auto-enrolment, what are the outcomes that we're looking for?
I also shared some figures about adequacy, so if you are a median income earner, the state pension is due to give you a 30% replacement income. I always try and talk about it as replacement income – it is like your final salary.
So the state pension is due to give you a 30% income replacement ratio and we added on auto-enrolment, which would take it to 45%. But that works only if you're on a median income. If you earn any more or any less, then the figures are completely different.
An interesting thing is if you're a reasonably low earner, then auto-enrolment will actually do quite a lot for you. As long as you stay in, by the time you're adding a state pension, you should be on about two-thirds of your final salary. But if you are earning £90,000 a year, auto-enrolment will give you only less than 30% of your present income.
A lot of what we have focused on so far today has been on how we communicate pensions. Bearing in mind the UK is not a saving nation and a lot of auto-enrolment's success could be because people are too inert to actually opt out. Are we expecting too much, at least in the short term, to expect people to engage with their pension saving?
Roberts: No. I think the common message around this table is we wouldn't be advisers unless we were out there trying to bang the drum. My expectation of my clients is to do as much as they possibly can. But I don't service a lot of people because, coming back to the point we were making earlier, I can't afford to.
Bram: I think in the short term, yes, there will be a large proportion of people out there who we are expecting too much from, but they will be the ones retiring in the next ten, 20-odd years. It will change as younger people come through.
Cochran: I absolutely agree with that. The people who are opting out are people in their 50s and 60s. The people that aren't opting out are the people in their 20s. Older people's parents tended to retire on final salary schemes. They all retired pretty well off and they were taken care of in retirement. People in their 20s see their parents not having a decent retirement income and they don't want the same outcome for themselves.
Veiro: Is that from the feedback you get from research? It's interesting.
Cochran: We drill down into this stuff. If you start saving in your 20s rather than in your 30s, your increase in retirement income – according to our figures – is almost 40%. If you share that message with them, it's probably less painful and they could get a much greater income in their retirement.
An ambitious objective
'Something completely new'
'Illusion of control'
Reasons to be cheerful
Total investment reaches £9m