Fewer and fewer of the UK’s legions of self-employed workers are making anything like adequate provision for their retirement, at least not by making regular contributions to a pension.
This makes ministers, whose job it is to look ahead of the curve and try to guess where we are all going, very nervous. Looming mass poverty for a significant population group is never a comforting scenario.
The situation has become so bad that the most recent set of numbers that I have seen suggested that the proportion of self-employed making regular pension savings halved between 2007 and 2016. Low incomes for certain occupation types may be a factor but in reality, over two million of these people would meet the auto enrolment threshold if they were employed and would, therefore, be swept into a system that provides generous employer and government top-ups.
Controversially, I believe that the FCA’s Retail Distribution Review (RDR), and its subsequent banning of commission payments has had a significant effect. Whilst not perfect, commission did make it economically viable for advisors to deal with lower earning clients.
Now that the incentive to sell to this group (no one ever ‘sells’ in the advice business any more) has been removed, they have been left pretty much high and dry. An unintended consequence if ever there was one, even if this likely outcome was flagged to the regulator well in advance of implementation.
We are, however, where we are, and I think a reintroduction of commissions is very unlikely (or even desirable) so new ways must be found to motivate and facilitate this group to provide for their long-term financial security.
As I noted above, for lower-earning employees auto enrolment (AE) has been very successful with millions now contributing to good quality savings products, and, more importantly, getting into the saving habit. The whole AE programme is, however, predicated on the employer acting as collection agent for the scheme and making a mandatory minimum contribution. Much harder to do for millions of self-employed with no obvious common point of contact.
So what can be done? Well for starters I would say that the mood music has to change. If I could be so bold, I believe that vast swathes of the pensions industry have been just awful at properly communicating their product offering. Not what it is, but what it does, and can be made to do. Many people still see pensions as dull, rigid, inflexible and about as happening as a lava lamp.
This is dreadfully unfortunate as a product that provides long-term security, tax breaks, helps to fund your own business, and can have benefits for inheritance tax purposes should just fly off the shelves. How did we get it so wrong? Needs work, definitely.
Technology can help too. When finally in operation, the proposed pensions dashboard should be an invaluable planning tool, not just for real-time valuations, but to provide suggested savings levels at assumed growth rates to help individuals achieve stated financial goals. Being able to track one's progress in this regard, potentially even on a daily basis, or to set your own review reminders, would all contribute to bringing pensions for the self-employed into the here and now, not the tomorrow that never comes.
None of this addresses the key problem of collections and inducements that AE so successfully offered. For the self-employed, there is no employer to deduct pension payments from earnings, add a bit and pass it on to each individual scheme, and then to receive a further government contribution. There is a strange effect of an automatic opt-in, where opting out takes some effort. Most people just go with it as all decision making has effectively been removed and it’s just what you do. To consciously opt out takes a positive decision. Real inertia in action and for once with a positive outcome.
The one organisation with whom all self-employed have contact is HMRC, who also has a well-established collections and payments process. So, a regular pensions contribution system could be operated by HMRC acting as agent for the scheme provider (emphatically not a government scheme, this is strictly private sector stuff). The government would need to decide if extra contributions from the public purse were appropriate, and if so, at what level this should be. I would suggest that this should at least mirror AE, and possibly a bit more on a like for like basis with the individual’s contributions.
An assumed opt-in, centralised collections, up to the minute planning and tracking technology and some seriously improved messaging - just might then do the trick.