Written evidence from PLSA (PAE0063)

About the pensions and lifetime savings association

We’re the Pensions and Lifetime Savings Association; the national association with a ninety year history of helping pension professionals run better pension schemes. With the support of over 1,300 pension schemes and over 400 supporting businesses, we are the voice for pensions and lifetime savings in Westminster, Whitehall and Brussels.

Our purpose is simple: to help everyone to achieve a better income in retirement. We work to get more money into retirement savings, to get more value out of those savings and to build the confidence and understanding of savers.

EXECUTIVE SUMMARY

1.       The Association believes that the Lifetime ISA (LISA) could be a valuable addition to the suite of products available to savers. However, for young people looking to save for their retirement, it is not an appropriate substitute for workplace pension saving. Therefore it is crucial that the Government is consistent in communicating to savers that the LISA is intended to be complementary to workplace pensions. It is important to avoid the risk of savers diverting saving from workplace pensions and losing out on the value of matching employer contributions.

2.       Since the LISA will be used by some people as a long-term savings vehicle it is important that LISA products meet similar quality standards to those which members of workplace pension schemes benefit from. Government should take steps to ensure that LISA products which might be held for decades have a high quality default investment option, strong governance in the member interest and a reasonable charge level.

3.       It is our view that the success of automatic enrolment has been underpinned by a broad policy consensus on the need to promote the value of saving into a pension – this must be maintained. The introduction of a new means of saving for retirement highlights again the need for a broad review of retirement savings policy.  That is why we have called for Government to set up a permanent Independent Retirement Savings Commission to advise on the direction of retirement savings policy.

INTRODUCTION

4.       The Pensions and Lifetime Savings Association welcomes the re-opening of the Committee’s inquiry into automatic enrolment to take into account the announcement of the introduction of the LISA in the March 2016 Budget. In addition to this submission, the Association would like to draw attention to the evidence submitted on 2 February 2016, and to the oral evidence given by its Chief Executive, Joanne Segars, on 23 March 2016.

5.       The Association believes that the LISA could be a valuable addition to the suite of products available to savers. As a vehicle for saving for a property purchase there are clear benefits for individuals investing in a LISA, through a government bonus more generous than under the current Help to Buy scheme. The LISA may also benefit some self-employed people who lack the option of a workplace pension with employer contributions. These are very different purposes with different timescales and, therefore, favouring different investment approaches; ensuring that savers do not risk detriment through confusing these purposes is a critical product design issue.

6.       As a retirement savings product for those eligible for a workplace pension, the situation is more complex. We welcome the Government’s description of the LISA as complementary to workplace pensions. It is crucial that this message is conveyed consistently to avoid the risk of savers diverting saving from workplace pensions and losing out on the value of matching employer contributions.

7.       Whatever purpose a LISA is used for we believe that the governance around it should be comparable to that which workplace pension savers benefit from. We have worked hard to raise standards in workplace pensions through our Pension Quality Mark standards and, since the publication of the OFT report on workplace Defined Contribution pensions[1], similar standards have been extended to the entire sector.  As a result, there is now a broad consensus around what a good workplace retirement savings product looks like, and it may be helpful to outline this here while considering how the LISA can be made to work in the interests of savers. In short, a good scheme should offer:

1. A high quality default fund. This should be appropriately diversified and with a level of investment risk suitable for its target membership;
2. Strong governance in the member interest. This should include governance of the default investment option. Critically, the scheme should be designed such that it operates well with minimal or no decision-making input from the scheme member.
3. Low price. Charges for workplace pension default funds are capped at 75 basis points. A competitive price for a master trust workplace pension product is much lower than this: circa 50 basis points. In addition, we expect trustees and Independent Governance Committees (IGCs) to focus increasingly on the level of transaction costs in their scheme ahead of the implementation of MiFID II.

8.       Simplicity of choice and clarity are also key considerations when assessing what a good retirement product looks like. Choice, particularly investment choice, should be an option for those who want to exercise it. Most people though will ‘choose not to choose’ and compulsory decision-making should be pared down for this group as far as is feasible. In general, investment decisions affecting the outcome for a scheme member should usually be the preserve of experts under the supervision of a trustee or an IGC. With regard to clarity, this should be reflected in communications which are clear, engaging and easy to understand.

9.       This combination of simplicity of choice, clarity, low price and high quality governance has many attractions and the Association believes it has application outside of pensions. In our view, this is not just a template for workplace pensions, it is a template for long-term saving products in general.

TO WHAT EXTENT IS THE LISA COMPATIBLE WITH AUTO ENROLMENT AND THE GOVERNMENT’S WIDER PENSION STRATEGY? WHAT IMPACT COULD THE INTRODUCTION OF THE LISA HAVE ON OPT-OUT RATES?

10.   Automatic enrolment has been a significant success so far, with over six million more workers now saving into a workplace pension[2] and an opt-out rate of around just 10%[3]. We are confident that the combination of a straightforward default arrangement and the value of employer contributions will ensure that participation rates remain high.  We are confident too that savers will continue to recognise the value of saving into pensions, notwithstanding the introduction of the LISA (and any similar savings products in the future). The evidence suggests that it is younger people, the target group for LISAs, who are most likely to value the opportunity to save for their retirement through a workplace pension. Opt-out rates among the under-30s are just 7%. [4]

11.   The Association has consistently supported automatic enrolment, with our members providing pensions to the majority of automatically-enrolled savers.  Our members have worked hard to help make automatic enrolment a success, and this work continues in earnest as smaller employers come to comply with their duties. It is our view that the success of automatic enrolment has been underpinned by a broad policy consensus on the need to promote the value of saving into a pension – this must be maintained. As such, we encourage Government to continue to communicate to the public the benefits of saving into a workplace pension, regardless of the introduction of the LISA and any interesting savings products that may be developed to encourage long-term saving.

12.   The introduction of a new means of saving for retirement highlights again the need for a broad review of retirement savings policy. That is why we have called for a permanent Independent Retirement Savings Commission to be set up to advise Government on the direction of pension policy.  We believe this is the best way to ensure that future policy is made for the long term, with a focus on the overall savings landscape, and in the interests of savers. A permanent Commission able to advise Government towards evidence-based, long-term retirement savings policy making would ensure that the success of automatic enrolment is supported by future policy decisions. 

TO WHAT EXTENT WILL THE LISA FILL THE GAPS IN RETIREMENT SAVING AMONG THE SELF-EMPLOYED? ARE THERE MORE APPROPRIATE ALTERNATIVES?

13.   From a tax perspective, the Lifetime ISA will be a better prospect than a pension product for those who are self-employed and paying basic rate tax. For this group, it is effectively completely tax exempt and, provided it is invested in an appropriate manner in a high quality product, it is likely to be a better option than a personal pension. However, the average age for self-employed people is approximately 47[5], whereas the LISA has an upper age limit of 40. That being the case, the LISA will not be suitable for the majority of people who are currently self-employed. 

Which groups would be better/worse-off saving into the Lifetime ISA than they would be under auto enrolment?

14.   As mentioned in Paragraph 6, the value of employer contributions earnt in a workplace pension will continue to ensure that, for the majority of savers - including basic rate taxpayers -  a workplace pension remains the best way to save. A basic rate taxpayer with a matched employer contribution will end up with a pot c. 60 per cent larger than an unmatched LISA[6]. Of course, for basic rate taxpayers who are paying into a workplace pension and who have surplus income which their employer will not match, a LISA may well be a sensible vehicle for this additional saving. This assumes that a LISA is invested in the same way and generates similar value for money as a workplace personal pension, which has not yet been established

What kind of guidance should be made available to help young people choose where to save their money?

15.   The Association sees guidance as being an essential part of a successful retirement savings policy. Information, advice and guidance may be of tremendous benefit to individuals as they think about retirement saving. This of course depends on individuals accessing such services and then acting on what they hear. The benefit to individuals from guidance and advice does not seem to manifest at the whole-population level.  Information, guidance and advice are not strong levers for increasing levels of saving.

16.   As noted above, for the purposes of retirement saving, the majority of young people are clearly better off saving into a workplace pension with an employer contribution. The LISA could be a good savings vehicle if young people choose to prioritise saving for a property but it is not at the moment an appropriate substitute for workplace pension saving. Note though that young people saving in a LISA will be saving for either a property or for retirement - probably not for both - if property purchase occurs before retirement, which it almost certainly will, then they will most likely withdraw their funds and have to begin saving again.

17.   For this reason, it will be important to ensure that young people understand what the implications are of prioritising property purchase over retirement saving, or vice versa. The new single pension guidance service will need to consider this issue carefully.

What impact will the option of using LISA savings to purchase a home (or potentially "other specific life events") have on pension savings?

18.   For an individual who uses their LISA savings to purchase a home (or for other life events) there are two broad issues. The first is the impact this may have on savings adequacy. In general once money leaves retirement savings, it tends not to come back. The experience of 401k schemes in the US shows that once money leaves retirement savings, it tends not to be replaced.[7] As such, we are concerned that the link is broken between retirement saving and adequacy in retirement. The ability to access savings at a time of one’s choosing – albeit incurring a penalty – severs the fundamental link between saving for retirement and maximising the chance of having an adequate income in retirement.

19.   The second issue is product design. At the time of writing there were 14 providers offering the Help to Buy ISA. These are all cash products suitable for short to medium-term saving intended for property purchase. The asset allocation (100 % cash) is very different to the suggested allocation for the early growth phase or mid-growth phase of a retirement savings vehicle. In these, it is reasonable to expect people to be heavily invested in growth assets, including a strong weighting towards equities. As a result, there may be a risk that some aspects of product design are not working in the best interests of savers. For example, it is feasible that many people will be saving towards property in a savings vehicle that is suitable for retirement but too volatile for short term withdrawals to be a good idea. Conversely, it might mean a scenario whereby people are saving for retirement in a product that is overweighted towards cash or other low growth assets.

20.   It may be the case that LISA providers deliver a market which is entirely segmented; that is to say into property-targeted LISAs (presumably similar in product design to the current Help to Buy ISA) and retirement-targeted LISAs, each with different typical asset allocations. Alternatively, unless the customer wants to make investment choices or it is an advised sale, product designers may wish to find a means to ensure that the customer has a suitable investment approach to meet their saving goal without compelling them to take investment decisions. That could potentially mean designing a product which starts a saver in cash and then automatically switches into growth assets once a customer has made a withdrawal to buy a property. It also points again to the importance of high quality governance, in the saver’s interest, for LISA products.

April 2016

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