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Are We Saving Enough?

The resounding answer from the insurance industry is a firm no.

The most recent Insurance and Financial Services APPG saw a cry for help from some of the Insurance industry’s top trade associations. The unanimous message across the board was simple; we need to get Britain saving more for retirement. Spokespeople from the ABI, APFA and BIBA all agreed that contributions towards individual pension pots was worryingly low and the returns necessary for a secure retirement are in danger of simply being unachievable, even with the eventual 8% minimum employee contribution that will be introduced by 2018.

So, the message is we all have to save more towards our retirement otherwise we will be living in poverty in our old age.

The next obvious question is how to actually achieve a rise in pension contributions from individuals.

Strangely, this was the part where the insurance industry’s biggest trade associations didn’t have a unanimous answer.

The issue lies in which option the Government takes to increase individual contributions to their pensions.

The first option would be to simply encourage the population to increase their pension contributions. The Association of British Insurers would like to see the introduction of an online pension portal that would mean people would be able to access all their pension information in one place. The Association also would like to see Retirement Commission to be set up to help drive ‘a national savings strategy’ and ultimately increase awareness for the tax reliefs on pension pots. A Government campaign could drive up individual interest in pensions and also promote further contributions in order that a healthy amount of savings could be achieved for retirement.

The issue with this option is the proposed effectiveness of the campaigns and whether or not people would ignore the advice. Average contributions to workplace pensions have dramatically fallen since the introduction of the auto-enrolment system in 2012. This was followed by the announcement that £2.5 billion has already been taken out of pensions pots by over 55s in the first 3 months after the pensions freedom were introduced. These statistics would suggest that individuals are either not interested or unaware of the importance of investing in a stable pension, which would mean another solution would need to be found.

The second option would be to raise the minimum level of contribution of individual savers. The Government has already announced that the minimum total contribution will rise to 5% of an employee’s qualified earnings in September 2017 and then 8% in October 2018.

However, many in the industry have already expressed that this percentage is too low to earn a decent level of income to ensure a comfortable retirement. There were quiet murmurings at the APPG from the association spokespeople that a rate beyond 10% would be necessary to achieve the returns needed for a healthy pension pot come retirement. The advantage of this option is the fact that individuals’ contributions will be set at a flat rate, set by industry experts and Government, which arguably would give ample resources to secure a comfortable retirement.

The issue with this course of action is the possible backlash from individuals over the amount of their salary that is being whisked away into an unseen pensions account. If a rate beyond 10% of an employee’s qualified earnings is necessary to ensure a suitable income for retirement, it would require the individual to input at least 5% of their salary and the employer’s input would rise to 4% using the current formula. The amount contributed suddenly becomes a very noticeable chunk of an employees’ pay. This rising rate could in turn prompt an upturn in the opt-out rate. The knock on effects of this could include a rise in fraud and individuals left with inadequate savings for their retirement.

Whatever views you hold on the Pensions reforms introduced earlier this year, there can be an agreement across the board on one matter. There are plenty of creases that still need to be ironed out. The reforms have been in place for 6 months now yet the debate still rages on strong as ever and should be expected to continue long into the future.  

If you’d like to discuss any of the issues raised in this blog, or how Lansons can assist you in preparing for regulatory change, please get in touch either via email or on +44(0)20 7490 8828.