By Glen Jenkins, CIPD reward examiner
The trend is clear both here and in the USA that saving in occupational pensions in the private sector is in decline. The recent announcement by the Office for National Statistics, although not including all company pensions, confirms this. The collapse has meant that the government has had to step in to stem the tide by forcing private sector employers to improve pension provision through the introduction of employee automatic enrolment to pensions for those employees who earn more than £8105 per year.
Some view this as the state helping employees to save for their future while others view it more cynically as a way of subsidising the financial services sector in a time of crisis. In short, employers will be required by law to pay into a workplace pension for all their eligible staff while the employee may opt out if they wish. The government expects more than two thirds of workers to remain in these schemes. Is this realistic and will it work?
For any employee considering taking out a defined contribution workplace pension needs to consider firstly if they can afford it. There are signs that employees may find this difficult when pay rises are falling short of inflation, as cost of essential needs such as housing, energy and food continue to rise and where the average interest rate on an instant access savings account is only 0.98 per cent! These would not be so bad if the underlying trend in wages as a proportion of GDP was rising but it has been in decline for some time. One cannot help being pessimistic that large numbers of workers in the private sector may not have sufficient disposable income to afford a pension now.
Secondly, Pigou, for example, implies that our ‘outer telescopic faculty is defective’, and that we, therefore, see future pleasures, as it were, on a diminished scale. Applying this to the present climate may mean employees are more likely to seek the pleasure of keeping their home warm now than when they are 75.Thirdly, there is the product itself, employees find these pension products extremely complex and relatively inflexible and consequently are sceptical or unclear about what it is they are getting into. With annuities at their lowest in years, what their savings will buy when they come to retire is an unknown factor and therefore a very hard sell at present.
In comparison, if employees invest in an ISA, at least they have some idea of what the risk is and what they will get from their investment. Finally, the unethical behaviour of the financial sector in selling financial products has added to this scepticism. This together with their role in the present economic crisis has led to very low confidence and trust levels with the financial sector.
These issues and others have highlighted in particular the high risk for employees of investing in such products. So much so, that a spokesperson for SAGA has recently stated that many low earners are absolutely right not to join a pension scheme. We shall have to wait and see what the take up is but if private sector employees decide ‘we’re out’ rather than ‘we’re in’, there will be long term repercussions for poverty in old age.
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