Written evidence from IPSE (PCT0022)

Summary

The number of people in self-employment has grown by 50 per cent since 2000, but the proportion of self-employed people saving for later life through a pension has, concerningly, remained low. Research from IPSE, conducted by ComRes, shows just 31 per cent of the UK’s almost five million self-employed pay into a pension, leaving 3.3 m unprepared for retirement[1].

Our research based on the views of self-employed tells us a significant part of this under saving is concerned with a lack of transparency from pension providers around the ‘basics’ of what an individual stands to gain from a policy, the essential terms and conditions, and key features a pension has to offer. Many people IPSE spoke to at focus groups felt pensions were difficult to understand and contained unnecessary jargon which in some cases led them to disengage with pensions completely by not saving into one.

IPSE calls on pensions providers to do more to strip away unnecessary jargon and engage with self-employed people in ways that are more likely to attract them.

Recommendations

1. Pension products should be more user-friendly and engaging: the terms of a policy need to be clearly and accessibly set out. Language should be used that is accessible to all.
2. Deliver the pensions dashboard: ready access to real-time, transparent information on an individual’s pensions pot/pots will allow them to identify how well prepared they are for later life and make improvements where necessary. For those who are disengaged, access to this information has the potential to reignite interest in planning their income for their later years.
3. Provide a free mid-life MOT: allow mid-career self-employed people with a check up on their financial health for them to identify issues and stage interventions to improve their retirement income whilst they are still in work.
4. Roll-out the sidecar pension: this flexible pensions product has the potential to meet the needs of disengaged self-employed people through its dual purpose to help people save for emergencies and for their later lives.
5. Government financial guidance websites should tailor more content towards the self-employed: their circumstances are separate from employees and require guidance that takes this into account. This will also widen access to free impartial financial guidance for self-employed people who are low-middle earners.

Background

"The industry has a duty to make pensions more accessible and attractive for the self-employed. It’s easy for providers to focus on employers and ignore the self-employed." - Lauren McMenemy, self-employed

There is growing concern about the lack of saving for later life among the self-employed. It is a serious worry not just for the self-employed themselves, but the Government and pension providers too.

IPSE is equally concerned about this growing issue, especially given the average age of self-employed people is 46, with 44 per cent of all self-employed people aged between 50 and 65, highlighting a section of the workforce that is closer to retirement age on average.

At present, just 31 per cent of self-employed people are paying into a pension while 67 per cent are concerned about their savings for later life. Although these figures show self-employed people are not saving as much, it clearly demonstrates that this is an issue at the forefront of their mind and they do want to save more. Other findings from our research include:

        Solutions self-employed people called for tended towards flexibility and transparency including:

• A flexible solution designed for the self-employed (31%)
• Clearer advice on pensions (26%)
• More transparency in terms of fees and on likely return on investment (23%)[2]

        After friends and family, government websites ranked second as a trusted source of guidance on pensions (51%) indicating a clear role for government to assist in this area.

        Women, less experienced, and younger self-employed people are least likely to save.

3. What is the relative importance of empowering consumers or regulating providers?

Empowered consumers will make better consumers. Presently, self-employed people do not feel empowered around pensions given their lack of participation is this form of saving (just 31%) and general feelings over lack of transparency outlined in our research[3].

Common criticisms expressed during our focus groups on this issue centered on pensions being “confusing”, “loaded with jargon”, that they are “inaccessible”, and are geared towards those with a higher degree of financial literacy.

Our nationally representative survey confirms this[4]. When asked what they self-employed people would like to see from their ideal pensions solution, 26 per cent wanted to see clearer advice on pensions and 23 per cent called for greater transparency on fees and on likely return on investment.

Capability in this last area does exist, but many self-employed people complained about pensions provider’s platforms being difficult to access and poorly designed and therefore made them disengaged with monitoring their savings. New providers entering the market, such as Penfold, are moving towards a more user-friendly app and web browser experiences which clearly outline to a user these essential points about their pension.

It is also worth remembering that self-employed people are independent by their very nature, and do not have access to a finance or HR department to ask basic questions around their pensions so any extra support would be welcome.

Recommendation 1: Pension products should be more user-friendly and engaging: the terms of a policy need to be clearly and accessibly set out. Language should be used that is accessible to all. In addition, platforms providers should aim to provide users with the essential information they need to engage with and make decisions about their pensions, such as how much their pot is worth now, and how much it is predicted to be worth in the future. Penfold is an example of a company aiming to do this[5].

4. How can savers be encouraged to engage with their savings?

As outlined in our answer to Question 3, IPSE believes the key to better engagement by self-employed people in their pensions lies in the way pensions providers are engaging them. Currently, providers are not engaging this group as positively as they could be particularly regarding transparency as set out above, but also by other means.

The pensions dashboard, which aims to allow individuals access to data on their pensions pots in real time, is an excellent way for self-employed people of all ages to identify the health of their pensions and make informed decisions about improving it where necessary.

A recent statement from the Secretary of State for Work and Pensions has put the future of the pensions dashboard in doubt[6]. IPSE is clear the pensions dashboard is part of a broad package of solutions to engage a generally disengaged self-employed community with their pensions and we support its continued delivery. It will also be particularly helpful for those self-employed people who have left employment with a pension from their employer, and serve as a reminder that they are not starting from zero and can continue to build on previous pensions pots.

Recommendation 2: Deliver the pensions dashboard: ready access to real-time, transparent information on an individual’s pensions pot/pots will allow them to identify how well prepared they are for later life and make improvements where necessary. For those who are disengaged, access to this information has the potential to reignite interest in planning their income for their later years.

Similarly, to the pensions dashboard, a mid-life MOT could have similar effects for self-employed people who are mid-career. The mid-life MOT is a way for an individual to answer a set of questions to identify their pension wealth so they are equipped with right information to improve their savings for later life. They can do so more than once. The Pensions Advisory Service is trialling this and feedback for their service so far has been positive[7].

Recommendation 3: Provide a free mid-life MOT: allow mid-career self-employed people with a check up on their financial health for them to identify issues and stage interventions to improve their retirement income whilst they are still in work.

Another way to engage self-employed people who are low-middle earners is to offer them a product that meets their needs. As outlined in our research, those at particular risk of not saving into a pension are women (who typically earn less than self-employed men), young self-employed people and those new to self-employment. The overriding call from self-employed people in our survey was that they wanted pensions solutions that provided flexibility, and current offerings were not flexible enough in their view. The sidecar pension aims to provide that flexibility by channelling payments into both a pension pot and a rainy day fund that can be drawn on in times of need. The rainy day fund would need to reach a certain cap before it can be drawn on.

IPSE believes the sidecar pension provides the flexibility that at risk groups are calling for. However, no providers are currently offering this product. Other providers have called for it in recent reports[8].

Recommendation 4: Rollout the sidecar pension: this flexible pensions product has the potential to meet the needs of disengaged self-employed people through its dual purpose to help people save for emergencies and for their later lives.

8. Do pension customers get value for money from financial advisers?

Our research suggests that in general, self-employed people trust their financial advisers (IFAs) with 42 per cent indicating this. Only 16 per cent said they distrusted their IFAs, but it is worth noting another 42 per cent said they do not use this service[9].  Furthermore, for self-employed people who are low-middle earners an IFA may be an unaffordable option.

Outside of friends and family, a clear majority (51%) trust in the guidance they receive from government websites such as the Money Advice Service and The Pensions Advisory Service. However, in feedback we received from focus groups many people suggested the guidence was focused on the needs of employees and there could be more content also focused on self-employed people whose circumstances are often quite different.

Recommendation 5: Government financial guidance websites should tailor more content towards the self-employed: their circumstances are separate from employees and require guidance that takes this into account. This will also widen access to free impartial financial guidance for self-employed people who are low-middle earners.

Conclusion

A overwhelming majority of the self-employed are not currently saving for later life through a pension, and with an ageing self-employed population, this could mean many headed towards later life without sufficient retirement funds. IPSE has concerns this could lead to a pensions crisis for the self-employed people.

The research IPSE has undertaken in focus groups and surveys made it clear that a lack of transparency is part of this under saving problem, in terms of a lack of clarity on return on investment, high volumes of inaccessible jargon in pensions polices, amongst other issues.

This can be overcome by government if it makes good on its promise to deliver the pensions dashboard, and also if it tailors more guidance towards self-employed people on its various websites. IPSE would like to see the pensions industry actively engage with self-employed people who currently feel the industry is focused solely on employees.

September 2018