So what does this watershed moment mean for the future of workplace pensions? There is little doubt that for employees, coming so soon after the introduction of auto-enrolment, it is another positive. But what about the possible benefits for employers?
Common threads
There are two themes running through the recent reforms. First is giving people more flexibility and choice when it comes to taking their benefits. Second is the expectation that people take more responsibility for their futures. This starts with auto-enrolment reducing some of the burden from the state. It ends with educating people, once they stop working, to manage their money effectively.
All these changes should chip away at the reluctance some people have towards pension saving. More choice at retirement, a lower rate of tax on withdrawals, the ‘guidance guarantee’ and assurance that charges will be capped at a sensible level should all help improve perceptions.
This is good news for employers that offer a good-quality pension scheme. Quite simply, if employees warm to the broadening appeal of pensions, an employer can expect a better return on its investment.
But, while many people will embrace the changes, there are points of caution. Research from New Zealand’s KiwiSaver found that one of the causes of opt-outs was persistent tinkering with legislation and little confidence among savers that existing benefits would continue. Belief will come from giving these reforms time to settle. In the meantime, financial education will be imperative to help staff make sense of the changing landscape.
Incidental changes
While education and guidance remain crucial to the future success of workplace pensions, the approach will need to evolve. Key to this will be reflecting the fact that income can be taken at different times, and that, irrespective of the changes, the final value of the pension pot depends on exactly the same factors. In many cases, this will still not be enough.
Savers will also need to think more closely about their investment choices. In particular, people may decide to take their benefits at different times, in some cases later than originally anticipated. For these people, investment options built around buying an annuity at age 68 will no longer be appropriate.
Despite this, we expect annuities to remain a popular option for people who want a guaranteed income. Meanwhile, default investment funds will, in the future, need to cater for a more diverse range of at-retirement decisions.
Blurred lines
Just as the choices broaden for people when they retire, we also believe that the lines between workplace pensions and other savings products could be blurred. A greater synergy between individual savings accounts (Isas, with their new £15,000 limit, could be seen, with people rolling money over from the former to the latter. There is even a compelling case for prioritising a workplace pension over an Isa for short- to mid-term saving, particularly for those in their 50s.
Against this backdrop, the relevance of corporate platforms (or wraps) is also more apparent. Under a platform, access to a pension, other savings products and financial education resources are available to employees online, in one place. What is for certain is that while the landscape continues to shift, employers will need options for their workplace benefits that can keep pace with the speed of change.
Dale Critchley is technical reform manager at Friends Life
Budget changes at a glance
- People will be able to withdraw from their defined contribution (DC) pension savings without restriction from age 55, rising to 57 in 2028.
- Withdrawals will be subject to the individual’s marginal rate of income tax, rather than the prohibitive 55% that currently exists.
- Every person with a DC pension will be given free and impartial face-to-face guidance on retirement choices.
