Written evidence from M&G Plc (PSL0021)

About M&G

M&G plc is a savings and investment company with a long-term outlook. Our aim is to grow our clients’ wealth and improve their environment by investing with care.

Serving clients in 28 markets across the world our broad set of asset management  capabilities allows us to offer clients a series of savings and investments solutions. Where appropriate, we combine this with our capital management expertise to align these solutions with our clients’ risk appetite. We welcome the opportunity to provide input on this important topic.

1. Do households in the UK have adequate pension savings for retirement?

According to a report[1] published earlier this year by the Pension Policy Institute (PPI) of the 11 million people in the UK aged between 50 and State Pension age (SPA):

•         Around 3 million will not receive a minimum income in retirement as defined by the Joseph Rowntree Foundation

•         Around 5 million will not receive a personally acceptable income

•         Around 10 million will not receive a comfortable income

In other words, the report suggests that only one in ten people aged 50 to SPA is currently on track to receive a comfortable income in retirement.   While other reports may suggest different proportions for those likely not to have a comfortable retirement income there is seemingly a consensus that while some households will have made enough provision for a comfortable retirement it is likely that many, perhaps most, have not.

It is also likely that the situation will continue to grow worse in the near term. In recent decades many workers, including those retiring now, were members of  defined benefit (DB) schemes that provided guaranteed levels of income throughout retirement. In the near future, however, there will be  a cohort of people entering retirement who were either never members of DB schemes or were only members for a very short period of time but equally are too old to have benefited from long-term membership of automatic enrolment schemes(or are self-employed and therefore have not been enrolled).  In the longer-term larger numbers of employees will enter retirement having  benefitted from having been automatically enrolled for most / all their working lives, but there will be a lengthy period of transition.

Despite extensive research, including that from the PPI, retirement saving adequacy remains difficult to assess definitively. Although the fundamental question seems straightforward - ‘are people saving enough to give them a comfortable retirement?’  - the situation is inherently complex:

• There are multiple definitions of, and opinions on, what constitutes ‘adequacy’. For example, are replacement rates[i] or absolute values the more appropriate metric? There is no consensus definition of adequate savings (or of adequate income).
• The concept of ‘retirement’ continues to evolve: a single age at which an individual ceases all income-generating work and begins to rely solely on pensions (or other assets) no longer holds true for many people.
• What constitutes a household has also changed significantly – it is no longer a single main earner (historically usually male) with a dependant partner (historically usually female). Household income may now include two, or more, incomes from a mix of retirement savings and employment.  In addition, there are now more single person households.
• The focus on actual savings which are to be used to fund retirement may no longer be entirely appropriate as sources of wealth and income become more diversified.  A household with limited savings (be that in pensions or alternative savings vehicles) but alternative sources of income on which they can rely may still be on track for adequate retirement provision.
• The rules around pensions are subject to ongoing change (e.g., changes to normal minimum pension age) which makes it harder to accurately assess the adequacy situation at any given point in time.
• The types of assets available to those reaching retirement (however this life-stage is defined) continues to change and this impacts on what is available to help achieve adequacy. A significant proportion of those currently reaching an age at which they can access pension savings are likely to have have access to DB pension savings and a property on which any mortgage is paid off.  In future years this may not be the case with increased reliance on DC schemes, reduced levels of home ownership, and later entry to the property market meaning people still have outstanding mortgages at a later point in their life.  In the shorter term there is likely to be a cohort who are not members of DB schemes but have very limited DC savings as automatic enrolment only began when they were a good way through their career.
• The traditional concept of ‘self-employment’ has changed. In the past those considered self-employed may have had a business or other business-related asset to sell in order to help fund their retirement.  Changes to the nature of self-employment (including the growing gig economy and moves towards service professionals being self-employed) means that such individuals are less likely to have a tangible / saleable assets to help them fund retirement.

These complexities mean that it is difficult to ascribe a ‘one size fits all’ set of criteria to retirement adequacy. However, a key starting point for the development of policy must be the establishment of common, robust definitions of the key concepts in order to allow measurements to be made and trends to be tracked. 

Once a definition of adequacy is agreed the initial focus should be on identifying those most vulnerable to not achieving that adequacy level and ascertaining what can be done to change this, whilst recognising that the solutions may be different for different cohorts.

Simply put, for those with many years to go before retirement there is time to make a difference to future adequacy through multiple measures. However, for those approaching retirement in the near term the potential for measures to make a material difference is much reduced and any policy actions which can be taken may be quite different than those which would apply to those with a longer time until retirement.

It is not clear from the direction of recent public policy how the government now views adequacy and the sums required to achieve it.  The Lifetime Allowance (LTA) provides a good example of this.  When it was introduced in 2006 the amounts that could be saved in DC and DB schemes before the LTA charge was triggered were largely the same.  Since then, there has been increasing disparity between the two forms of pension, with the amount that can be saved in a DC scheme before the LTA charge is triggered now different than the equivalent in a DB scheme.  This raises legitimate questions about the level of retirement income that the government now regards as adequate. i.e. Is it the level that can be achieved in a DB scheme before the LTA is trigged or the equivalent level in a DC scheme?

As well as the question of overall adequacy, how retirement savings are distributed across an individual’s later life is also an issue. The decline in the number of people securing a retirement income via an annuity has altered the likelihood of people achieving an adequate income from their accumulated pension wealth throughout the entirety of their retirement.  Some people may access their savings too quickly and thus run out of money and there are also concerns that for some an over cautiousness and a desire to save ‘for a rainy day’ means that they do not access pension savings when they perhaps should and therefore have a less comfortable income than they could afford and subsequently do not spend their accumulated savings.  An adequate income across the entire period of retirement is not achieved if the individual’s pension savings are not accessed due to an excess of caution nor if retirement savings are depleted too quickly.  The shift away from annuities has removed a key source of mitigation of longevity risk for many people: annuities spear the income across an individual’s lifetime and protected against the risk of running out of income for those that live for longer than expected periods after entering retirement.  If they do not utilise annuities then individuals must find another way to estimate their own longevity and manage the risk of potentially running out of money.

2. Are changes needed to auto-enrolment to provide an adequate level of pension savings for retirement?

The 2017 Review of Automatic Enrolment[2] proposed the removal of the lower earnings limit in the mid 2020’s and a reduction in the age at which automatic enrolment starts from 22 to 18.  We believe that these measures should be implemented as soon as is practicable.  The more people save, and the longer they save for, the more they will have to help them achieve retirement adequacy in later life.  Delays to the implementation of the recommendations delay people achieving those increased retirement savings.

We believe that the £10,000 earnings trigger should also be reviewed, specifically for those with multiple jobs, each of which individually generates earnings below the trigger but cumulatively would exceed it.  Consideration should be given to including such individuals within automatic enrolment. 

Additionally we feel that a further review into the level of saving which can be practicably be achieved with the current minimum contribution rates should be undertaken alongside consideration of the practicalities, wider societal implications and financial impact (on all parties including savers, employers and government) of increasing minimum rates to 12% over a suitable lead-in period.

It is our view that consideration also needs to be given to what happens beyond automatic enrolment.  The increase in the number of people saving into a pension as a result automatic enrolment has been a great success but we are concerned that individual savers may see the automatic enrolment minimum contribution levels as an indication of what they should be saving and may expect this amount to provide them with an adequate retirement income.

Care needs to be taken that the success of automatic enrolment does not inadvertently impede further progress on achieving pension adequacy. Automatic enrolment means that more people are saving and while this is very welcome it does mean that they are doing so without needing to take any positive action and without necessarily engaging actively in considering their retirement plans and the overall provision that they might need to put in place. Even an increase to a 12% minimum contribution rate may be insufficient to achieve a comfortable retirement for many.  As such automatic enrolment should be seen as a foundation on which we now need to build, engaging people further with the concept of retirement savings and encouraging realistic conversations about their likely future income and the contribution that their automatic enrolment provision will (and will not) make to an adequate or comfortable retirement. 

Consideration should be given as to how we move beyond the automatic element of pension savings toward greater individual engagement, improved recognition that minimum savings amounts are unlikely to lead to a comfortable retirement, and leading over time to voluntary increases in savings rates.

3. What advice and guidance do people need when saving for retirement?

Savers can access a significant amount of information about pension products and retirement, though there is a danger that this could lead to information overload and decision paralysis, particularly for those who have not previously engaged with financial services products. 

This is exacerbated by the fact that at least some of the material that is  labelled ‘guidance’ is more akin to what people would think of as information and does not help to ‘guide’ the saver to an outcome.  Clearer definitions of ‘guidance’ and ‘advice’ and the possible interim stages between the two, such as those included in the Committee’s recent report on accessing pensions, may help to deliver genuine guidance.

In addition to the definitions of guidance and advice further consideration should be given to who should be receiving which type of counsel. When it comes to the saving for retirement ‘journey’ two broad groups can be identified:

• The first group, those usually discussed in this context, are those who are approaching retirement or are at least approaching the point at which they are permitted to access their pension savings.  This group may need help to decide what to do with their amassed assets and income streams (annuity; drawdown etc etc).

• The second group – who we feel are often neglected in discussions about guidance and advice – are those much earlier in their working life who still have the time and opportunity to save more.  Earlier advice and guidance could significantly help to improve retirement outcomes for this group. An understanding, even at the basic level, of what they are saving for and the impacts of compound growth, inflation, tax relief and employer contributions could all help people to see the value of pension saving. Automatic enrolment has been a huge success but even at increased rates (including impacts of removing the lower earnings limit etc) the amount saved may not be enough for many. At the very least participants in automatic enrolment should be put in a position where they can understand the choices available to them at the accumulation stage. Both government and the pensions industry need to engage with these individuals to get them thinking proactively about pensions and retirement.

Within these two groups there will, of course, be major differences in individual circumstances and this is a reason that true guidance or advice - rather than generic information - is particularly helpful as it can take account of those individual circumstances.

In the longer term increased financial education in schools may help to encourage better – and earlier – engagement with pensions and long-term savings issues more generally but even if such early, broad financial education can be integrated into the school curriculum additional guidance and advice will still be necessary in adulthood (not least to take account of changing public policy).

The reputation of pensions and the pensions industry also influences attitudes towards retirement saving. Many factors will shape this reputation – not least the industry’s own performance and behaviour - but public policy also has an impact and there are actions which government can take which could help to improve the overall reputation of retirement provision. These include:

• Actions to tackle investment / pension scams.  If individuals believe that pension products are not safe or that the risk of fraud or scams is high, it is likely to be harder to encourage them to act to increase their own savings.  Even if actual cases are rare the negative effect of stories about people losing their money is powerful.  A ‘zero fraud’ scenario is unlikely to be realisable, but there are nonetheless actions which government can take to reduce its incidence, whether actions to reduce current scamming opportunities or ensuring that any new policy measures being introduced do not inadvertently increase the opportunities for such criminal activity.  For example, including paid for advertising within the Online Harms Bill should help reduce the existing level of scams; and when new policies, such as a pension statement season, are being developed their potential to create new scam opportunities should be fully assessed. .

• Full, open, and timely stakeholder consultation whenever material changes to retirement saving policy are being considered.  Pension policy is complex with many interlocking parts. increasing the risk of unintended negative consequences when change is introduced. Full, open consultation with stakeholders in advance of any policy change with the potential to impact on the sector helps to improve the outcomes and to avoid negative, unintended, consequences.

• A clear overall strategy for retirement saving to guide policy decisions.  Another consequence of the complex nature of pensions is that they are subject to a significant amount of change and are shaped by rules set by multiple agencies (e.g., Treasury, DWP, HMRC, FCA, PRA, TPR). A clear overall strategy for retirement saving, against which specific policy changes could be assessed, would help ensure a coherent direction of travel.

4. Could retirement income targets help savers plan for retirement?

With no consensus definition of adequacy and with individual circumstances varying so greatly income targets are only ever likely to be a very rough guide of the outcomes to which individuals should aspire.

Even if meaningful income targets could be identified the issue of affordability will remain for some.  Saving for retirement means forgoing current consumption and for those whose household budgets are stretched (and potentially more so in the months to come with possible increases in energy prices and other costs) this may be unachievable. If someone is simply unable to meet the indicated target it may even have the undesired effect of causing them to stop saving as the goal seems unachievable.

If individuals are to (a) have adequate means in retirement and (b) be required to take greater responsibility for their own provision, then the affordability of pension savings and the relative priority that people attach to it is going to have to be considered by public policy as part of an integrated strategy. 

5. Apart from increasing contributions, how can the Government improve outcomes for savers?

We believe that there are 3 distinct pillars which can help improve outcomes for savers:

(1)                  Taking a more rounded approach to pension charges: Some asset classes with higher return potential are by their nature more expensive to access.  A charge cap that considers charges in isolation from returns and does not look at an holistic measure of value risks excluding members of some types of scheme from accessing some assets.  The charge cap has understandably sought to ensure that the charges that individuals pay are kept low but the focus should now shift from ‘cost’ (or charges) to a more rounded assessment of ‘value’ – all other things being equal an investment that charges 0.5% and returns 1% growth is less costly, but also of less total value, than one which charges 1% yet returns 3% growth.  In terms of the measure of value both trustees and IGC’s are already tasked with helping deliver value on behalf of scheme members and more should be made of this oversight and governance aspect.

(2)                  A consistent & long-term strategy: Publishing a long-term strategy for pension / retirement provision against which all policy proposals with possible consequences for pensions can be measured would have value. This should include a commitment to full stakeholder consultations in all but the most extreme circumstances. Policy change can lead to unintended consequences including increased complexity and confusion and there is concern that negative headlines can erode trust and can put people off saving in a pension.  For example, some elements of the proposed changes to Normal Minimum Pension Age (NMPA) will lead to additional complexity and uncertainty for members, which risks reducing levels of engagement..   The longer-term consequences of changes should be considered carefully, and their communication and explanation factored in from the outset of policy design.. A clear, consistent approach which accounts for, and minimises, clashes between policy measures and unintended consequences could significantly help to improve outcomes. Where legislation impacts on product design or on the likelihood that providers will offer certain solutions - such as the impact of Solvency II on annuity availability – this should be expressly identified.  In the context of the new Framework for Financial Regulation that HM Treasury is developing it will become even more important that the regulators – who will have significantly increased rule-making powers – have a clear sense of the overall pensions policy strategy within which they should operate and against which their specific proposals will be assessed.

(3)                  Building trust in pension savings:  When it comes to encouraging people to make, or increase, contributions trust in the system is important and avoiding unintended consequences is only one way of improving trust. Ensuring that action is taken on scams and scammers can both help to improve outcomes in individual cases but also increase trust in the system and the reputation of pensions, which can in turn encourage increased saving.

6. Can pension providers change the design of pension products to improve outcomes for savers?

There are a variety of pension products available, but the basic design is similar in most cases: a long-term savings product which eventually provides an income, a lump sum, or both at the point where an individual is legally entitled to access it without significant tax penalty (i.e., 55 increasing to 57).

Since the introduction of pension freedoms individuals are no longer required by tax legislation to annuitise but public policy remains central to product design and consumer interaction.. Tax rules, charge caps, disclosure rules, advice and guidance rules all provide very clear parameters within which producers must operate. For example, since the removal of compulsory annuitisation much of the behaviour of individual savers has been driven by tax treatment (taking large amounts out of a pension beyond the tax-free element is likely to increase an individual’s tax liability) and many of the routes taken by savers are designed to maximise short term tax efficiency rather than necessarily being driven by the maximisation of  beneficial long term planning for retirement.

Whilst new variations of product may develop over time the basic principle is likely to remain the same unless there is a significant shift in government approach.

Whilst providers are limited to how much they can do within the legislative structure of authorised retirement products they can take actions to help improve outcomes via routes other than product design, such as finding new ways to offer guidance / advice to help people make the most of their savings including making the most of digital options.

Providers can also help savers to deliver on broader outcomes that matter to them, beyond the generation of returns.  They  are also able to help people to ensure that they . fund their retirement needs in a way that is congruent with their values, most notably by facilitating sustainable investments..  Here too there is a need for public policy to be consistent ensuring – in policies on charge caps, for example – that saver choice is not artificially constrained.

Many of the levers to allow for change to improve outcomes lie with government.  It is important for both providers and consumers that there is consistency in policy and  clear direction from government on its ambitions for pension saving.– this clarity and consistency will help drive product development and design.

7. What should the Government be doing to support self-employed people to save for retirement?

The self-employed cannot be brought into pension savings via default (as with automatic enrolment) and they do not benefit from employer contributions.

Perhaps even more importantly there is no single ‘type’ of self-employed individual, it is a widely varying group – this means that one size fits all solution will achieve the aim of improving pension provision amongst the self-employed.

With this group the most successful strategy is likely to be to encourage saving through education and understanding

8. Are different or additional measures required to help gig economy workers save for retirement.

Considering those operating within the gig economy separately from the traditional self-employed is a good first step as they are very different working models.  More work is needed to ascertain how the pensions system – designed for those with more traditional working patterns – fits for those involved in the gig economy.  For example, the annual allowances assume that earnings are spread, relatively evenly, over an entire working life.  As both working, and earning, patterns now very often vary from this previous ‘norm’ we believe that policy levers such as the annual allowance should be reviewed considering this.

9. Are there measures which the Government should consider to close the gender pension gap?

It seems likely that the main cause of the gender pension gap is that women earn, on average, less than men.  This means they are less likely to be auto-enrolled and will be saving less when they are. Additionally, where women have  carer responsibilities – for children or for older relatives -  the total period during which  they are earning and able to build up pension savings may be reduced.

This would suggest that solving the gender pension gap would require policy measures beyond those directly aimed at pensions and the pension sector. 

February 2022