The responses to the Pensions Dashboard consultation and some of the subsequent social media discussion tell us much about the state of retirement income planning in the UK. I have not seen anyone who believes the dashboard is a bad idea, although there has been some debate about its cost and who should pay.
The proposal is that those who will benefit most from the existence of a dashboard should contribute most towards the cost of delivery. This is a crucial point; if you are a pension scheme that will have to invest in new technology to enable data to be pulled onto the dashboard you already have a cost before you contribute to the cost of the dashboard’s development.
So, who benefits from the dashboard?
Firstly, those consumers who have lost contact with older pensions. It could also be argued that the schemes that hold those pensions benefit because, if the member reconnects with their pension, they will not have the cost of finding a ‘gone away’ member. For obvious reasons, this is why the Association of British Insurers (ABI) want a very tight delivery timetable.
However, this introduces the next challenge – why would a consumer use the dashboard? We know it’s a large expense just to get to get to a point where someone who knows they had a pension at a company when they worked there, to actually find it. Could people go to the dashboard just to see what pensions they have? It could require a large advertising campaign to encourage such behaviour which will be another cost.
What the Pension Dashboard delivers has to be appealing to the consumer. Currently pension scheme members receive annual statements. Being kind, many statements do not receive more than a cursory glance. The idea behind them was that people would know how their pension was doing by showing what they may receive in today’s money.
In its simplest form, the Dashboard will show all these statements in one place and, eventually a State pension forecast. For many, the State pension will be by far the biggest element of their retirement income.
At this stage it is worth reminding ourselves where the proposal for a Pensions Dashboard came from. The Financial Advice Market Review (FAMR) was undertaken to understand why so many people were not engaged with financial services and did not seek financial advice. Recently, it has been stated that only one in three people do so at retirement which is a point in life when most should.
The purpose of the dashboard is to encourage engagement with financial services. In response to this, People’s Pension have proposed that not only should all pensions be shown, but their charges should also be shown. This will encourage movement from more costly pensions to cheaper ones. Both the consumer and efficient providers should benefit from this.
It is interesting the People’s Pension also propose that the dashboard should show other assets such as ISAs, Shares, Bonds and so forth. This recognises that although pensions may be the most efficient way to save for retirement, at any particular time, it is not always the best way. Self-employed and people building businesses may wish to hold assets that are easily realisable to help with the development of their businesses.
When they retire, people have a range of assets that have to be drawn down in an efficient way. This brings us onto houses.
One of the problems with pensions is that you give up consumption today to have wealth that can be consumed in retirement. Who knows what spending they will incur in retirement? Everyone is different. Some may spend more in the first year of retirement that they spend in the last year of working. Others may spend a lot less. It depends upon how they use their new leisure time.
It has been estimated that, on average, someone renting throughout retirement needs £180k more in their pension pot than a retired home owner. That aggregate rent is probably the utility value of owning a home. However, a home is an asset that can be used in a variety of ways to supplement retirement income. It therefore has a dual purpose in retirement planning.
The Equity Release Council proposed the value of houses should also be included on the Pension Dashboard. Some of those in the pensions sector have raised their hands in horror that the home can be part of retirement planning. This is despite survey after survey showing that over 30% of those approaching retirement are expecting to use their home to supplement their pension.
I believe the Equity Release Council proposal to be an excellent forward-thinking proposal. People are more engaged with their homes than they are with their pensions. Go back to why FAMR suggested having a Pensions Dashboard in the first place. They wanted people to engage with their pensions and retirement planning. How better to do this than using their house as they draw towards their pensions?
Routes through work are changing, retirement is changing, retirement wealth needs to be used in more flexible ways to respond to what clients are doing in their lives.
Building the infrastructure for the Pension Dashboard will not be easy and for the time being we should concentrate on that. It should be delivered in such a way that it is an easy next step to encapsulate all wealth. This will help increase the engagement with holistic retirement planning.
Bob Champion is chairman of the Later Life Academy (LLA)