And they need encouragement to do so, particularly in the light of the government’s recent pensions reform and the collapse in pension contribution rates experienced in 2014.
The review, which was carried out over a two-year period by Professor David Blake, director of the Pensions Institute at Cass Business School, on behalf of the Labour Party, says that pension reform has thrown the future of pensions provision and tax incentives for saving fundamentally into question. Auto-enrolment hasn't helped.
Office of National Statistics figures, published last September, showed that the average contribution per employee had fallen from 9.1% in 2013 to just 4.7% of salary and that, while employees were paying in on average 1.8% of salary, employers had cut back their contribution to 2.9%.
Under auto-enrolment, the level of contributions has been staggered to help make the requirement less painful for both employees and businesses. It is currently 2% and will rise to 5% in October next year and 8% in 2018.
But Blake says that to achieve “a decent-sized pension pot for retirement, it is necessary to make adequate pension contributions – something in the order of 15% of salary”.
Even if people do save an adequate amount, the recent freedoms introduced by the recent pension reform leaves them vulnerable to fraud and investment scammers, and open to exploitation by being sold “inappropriate, over-engineered high-cost products” or overpaying for advice.
“Many consumers through ignorance, overconfidence, arrogance or reduced mental capacity, do not recognise their own vulnerability.”
Blake believes that doing away with the requirement to annuitise pension assets means that pension schemes no longer need to fulfil their primary role of providing a life-long retirement income. “A pension scheme is now no more than a wealth accumulation scheme,” he says.
Nevertheless, “There is no doubt that the new pension freedoms are very popular with pension savers. Indeed, free market supporters describe them as ‘inspired’. It is clear the changes cannot be reimbursed.”
Instead, he suggests, what is needed is a national narrative that builds a consensus around retirement income. In order to achieve this, it needs contributions from not just government and the pensions industry but the national media, regulators and politicians – “all the king’s horses, all the king’s men – and all the king’s women”, as he puts it.
The pensions industry needs to change tack and work together to offer the best designed and valued products and services and show clearly how these fit into the retirement journey of their clients.
They should focus on defined contribution customers with pension assets of between £30,000 and £100,000 because this group is most at risk (those with assets below £30,000 will be cared for by the state pension and welfare benefits, while those above £100,000 will see the advantage of seeking professional financial advice).
The simplest solution, Blake says, is a safe harbour retirement income plan which encompasses: a simple decision tree and a limited set of default pathways; products that deliver income flexibility and inflation and longevity protection; and financial help.
The national media has an important role in getting the right message across. At the moment, there is a divide between the “This is your money and you are entitled to do with it whatever you want, when you want” message promoted by the mainstream media and the more considered, longer term approach generally adopted by the financial services press.
Other recommendations include transferring the power of the Financial Conduct Authority to regulate contract-based schemes to the Pensions Regulator which already regulates trust-based schemes, to create a single pensions regulator. This would help to provide better consistency of treatment between to the two types of schemes.
Blake wants to see a pension tax and tax relief framework established that reflects how normal people behave and encourages the optimal level of pension savings, a new permanent independent Pensions, Care and Savings Commission that reports to parliament, and a national retirement savings target of 15% of lifetime earnings achieved through auto-escalation.
Without a commonly agreed national narrative though, he warns, “We could end up in the position where people’s aversion to annuitisation combined with their willingness to pay highly for both flexibility and guarantees in drawdown products leaves many of them not much better off and possibly worse off than if they purchased an annuity to begin with.
“In other words, the behavioural bias against annuities could be used by the pensions industry to extract as much if not more from a customer than a ‘terrible poor value’ annuity.”
One area that Blake does not consider is the vexed question of the state pension age. That particular task has fallen to John Cridland, former director general of the CBI, who yesterday was appointed the first independent reviewer of state pension age by the government.
He will gather evidence on the state pension age and will consider whether the current system of a universal state pension age rising in line with life expectancy is optimal in the long run. He will not comment on the existing state pension age timetable.
At the moment, the state pension age will equalise at 65 by 2018 and go up to 66 by 2020. But some commentators are predicting that young people coming into the workplace for the first time now will not receive their state pension until they reach their mid seventies.
Cridland will come back with recommendations in time for the government to work out what it wants to do, if anything, by May 2017.