Chicken Licken and the pension credit card

This week’s storm in a teacup award goes to the furore surrounding ‘pension credit cards’.

Ever since we heard about the reduced tax on death in retirement we have had the phrase pensions bank account bandied around in the media. It certainly grabbed the public’s imagination – and was a definite improvement on talking about ‘UFPLS’ which was the concept it was employed to describe. At least people understood what it meant. But as soon as we had pensions bank accounts then that led to speculation about pension debit and credit cards and being able to get your pension income from a hole in the wall.

But it has left the pensions industry – and in particular pension providers – running about like Chicken Licken predicting the sky is about to fall in. They are frantically worried about people accessing their money easily and simply, saying that it is sending out the wrong messages, pensions aren’t the same as bank accounts, it will only encourage irresponsible behaviour, people will just go on fancy car spending sprees, and end up with nothing for their later life. Plus it just can’t be done with the amount of paperwork involved every time someone takes an income withdrawal. Plus we – the ‘traditional providers’, that is - are not going to be in a position to do it for a while yet.

I find this an over the top reaction. Let’s get a few things straight. The minute the Treasury created pension freedoms they created the big risk many people will outlive their money. Whether they go on fancy spending sprees, invest it in a too risky environment, invest it too cautiously, underestimate their lifespan – whatever. There are a hundred and one reasons. Giving those people who want it, easier access to their money is not going to really affect this in the big scheme of things. Many people risk running out of funds regardless. I’m afraid that is now life.

And the paperwork point. All this can be overcome with a good will. Just because we have always done income drawdown withdrawals this way doesn’t mean we can’t reform and improve. Those who want to get around the paperwork hurdle will do so.

Providers seem to naturally be taking it on themselves to be the guardians of ‘proper’ consumer behaviour. They are advocating they give the consumer numerous warnings about the risks of running out of funds, and warn of the terrors ahead. They should be applauded, of course, for this. I can’t – and won’t - object to people receiving the right warnings at the right time. But I am at a bit of loss why providers want to don this particular hair shirt, and take the responsibility solely onto their shoulders.

Government created pension freedoms. Government created the vision responsible people will use their funds as they see fit. Government also created the regulator – whose job is to ‘protect consumers, ensure our industry remains stable, and promote healthy competition between financial services providers’.

So, instead of pension providers sat there on the beach like King Canute telling the waves not to come near, they should accept that pension bank accounts and credit cards will happen.  Somebody somewhere will innovate to introduce it. And very soon after April 2015. People will like it and use it. The momentum was created when the Treasury first uttered the words ‘pension freedom’, and it is, to some extent, unstoppable. The genie is already out of the bottle. The idea is already out there.

 I don’t think providers should have to solely take on the role of moral guardians – although they seem very keen to do so. The only one who can halt this particular development is the FCA. If taking pension income from a cashpoint will really encourage very risky behaviour and is a Bad Thing, then it’s up to the FCA to stop this. I appreciate the FCA has a list as long as your arm of what it has to do before April, but this is its job. It’s there to protect consumers and maintain a stable industry.

So, please can it engage in this discussion and say where it stands. Because pension credit or debit cards are coming to a cashpoint near you. And soon.

Automatic enrolement's mid-year report

In 2014, the pension pundits prophesised, automatic enrolment will hit the rocks.

So far the implementation of `automatic enrolment has been relatively stress free. Employers have been doing what they’ve been told to do and enrolling their workers. And employees have also towed the line and stayed put in their pension schemes and paid their money. However, as the size of the employer staging began to get smaller, we all got a little bit jittery. Would employers comply? Would employees opt out? Would there be enough provider capacity?

As the end of 2014 draws into sight we are getting a better idea of how this year has gone. Or at least the first half of it. Evidence of employers’ non-compliance is starting to appear and the Pensions Regulator has issued its first fines – a £400 fixed penalty each for three employers who were April stagers but failed to meet their automatic enrolment duties. As the number of employers staging has gone through the roof this year, I think only three fines is impressive. It seems employers are getting to grips with automatic enrolment, although I am sure there will be more hiccups along the way.

And it also seems employees are also comfortable with the concept. The Department for Work and Pensions (DWP) has just released its qualitative research into employer compliance and opt-out rates. 46 companies were involved in the research. Their staging dates fell between January 2014 and July 2014 and the research covered 7,200 employees (the employers researched had between 90 and 499 employees each). But 44% of the workforces were already members of a pension scheme, and only 35% were automatically enrolled (the other 21% weren’t eligible for various reasons).

Out of those automatically enrolled 12% opted out. OK, that’s a rise from the 9% reported for the 2012/13 intake, but still in the great scheme of things a good solid result. Even when you take into account that a further 2% stopped contributions in the two or three months after the opt-out period closed, bringing the ‘real opt out rate’ to 14%.

Those who opted out tended to be older and/or part-time workers. The main reasons they gave were affordability, already having adequate retirement provision, being close to retirement, employer contributions being too low, or planning on moving jobs soon. So far, all very predictable.

But the research is also interesting for what it tells us about how employers are tackling the automatic enrolment problem, especially when compared to bigger employers last year. For example their implementation costs were a lot lower – usually between £200 and £700. That’s mainly because they did the work in house – the HR professional just added it to the long list of other work they had to do. Bigger employers last year employed consultants and got legal advice so pushing their bill skywards. Instead, the main cost for the employer class of 2014 was time. And their advice to other employers is to take six to nine months to prepare, rather than the three to six months they crammed the changes into. You have to feel sorry for the poor HR professional who got automatic enrolment dumped on their desk.

Of course, smaller employers enrolling later this year and over the next couple of years won’t even have the luxury of a HR professional. So, either the boss will have to do the automatic enrolment work or they will have to employ someone else to do it, which would add to their costs.

This year’s employers are comfortable they can cope with future administration costs. But the escalating cost of employer contributions worries them. The way they think they will cope is by adjusting salary, slowing recruitment or increasing prices. All obvious strategies. I would like to see - in time - a bigger study by the DWP into how employers coped with the costs, and the implications for the labour market.

Finally, the other major concern at the start of 2014 was if there was enough provider capacity to cope with all the employers staging. For our sample of employers that didn’t seem to be a problem. The majority used mastertrusts and the most popular by far was Nest.

So, what’s the verdict of the mid-year report into automatic enrolment? Well, all things considering, it seems to be going fine. Not too many employer fines and a nice low opt out rate. And Nest hasn’t fallen over. Yet. One cynical thought, however, is 46 employers is a very small sample out of the thousands who had staging dates between January and July, and so there are always going to be problems which the research hasn’t uncovered.

Another concern is these are still employers who are pensions savvy – almost half the workforce are already pension savers. Once we move onto employers who are pension virgins, however, a different picture might emerge.