Put the saver first - (Abridged)

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Michael Johnson on catalysing a savings culture

In Put the saver first, top pensions analyst Michael Johnson:

  • demonstrates  why the financial services industry is widely, and justifiably, distrusted
  • puts forward 104 recommendations for reform of the pensions industry
  • argues that the industry should concentrate on giving customers what they want – which in 90% of cases is simplicity

The retirement savings industry is in the Last Chance Saloon of public opinion, writes Michael Johnson in Put the save first: catalysing a savings culture. This matters: public hostility towards the industry contributes to Britain’s lack of a savings culture. Without savings to fuel the investment required to drive increased productivity and economic growth, our quality of life will deteriorate.

In this new report, Michael Johnson shows how the interests of the nation and the industry are not aligned. Consequently, the industry has to change. This report makes 104 proposals (including 19 primary proposals), mostly to be implemented by the industry itself; only the industry can redeem its own reputation. But Johnson makes it clear that there is only a brief window of opportunity within which the industry could achieve this; 2017 could herald major state intervention (coinciding with the planned review of auto-enrolment and NEST).

Specifics proposals to the industry, acting collaboratively, include establishing:

(i) an industry-wide DC pension pot consolidation service. As a “BACs for pensions” clearing house, it should facilitate the payment of contributions and transfer values, with a bridge across to NEST; and

(ii) an annuities clearing house, in which all annuity providers participate.  The annuity Open Market Option should be replaced by mandatory exercise through the clearing house, which should offer a limited number of simple, standardised annuity contracts, plus a more tailored suite of enhanced annuities.

If these facilities are not operative within three years, say, then the Government should establish them.

The industry’s ability to redeem itself rests on remembering that its customers are providing the scarce resource upon which it relies: their savings capital. The industry should give customers what they want. Over 90% of the population has very simple requirements of the industry: the industry is not meeting them. People crave simplicity, including a single savings account that serves two basic needs: discretionary (rainy day) savings and retirement savings: this report proposes the Super ISA account, an enhanced form of today’s ISA.  All new-borns should be allocated a Super ISA, identified by their National Insurance number. In the meantime, today’s ISAs could be linked to NEST accounts (to become Super ISAs). In time, every citizen would have one seamless savings vehicle from cradle, via employment and into retirement. 

Other industry-focused proposals include the IMA ceasing its involvement in the labelling of funds, including scrapping its “Absolute Return” and “Protected” tags, not least because, as an industry body, it lacks a common purpose with consumers.

A number of proposals are made to address the lax governance of pension funds. Crucially, trustees need to start behaving as the principals they really are, helping to drive the reshaping of the industry. Trustees ought to be the catalysts for change, but many professional trustees are conflicted.

The regulatory regime is not fit for purpose.  This report describes the blunt instrument that is classical regulation as totally unsuited to engendering trust, which is not created through regulation. Prudential oversight should be de-emphasised: a new approach is required. Regulators should “encourage” the industry to sell benefits, not products, and dramatically improve its efficiency by cutting costs. But today’s regulators are not equipped, neither operationally or culturally, to usher in a period of regulatory enlightenment and innovation.

The advice arena is characterised by ministerial fatigue, not least because “good” advice is hard to define. The RDR will do little to help catalyse a savings culture, and invites an arbitrage as it only applies to “advised” sales; advisers could get round the ban on commission by focusing on “non-advised” sales. The IFA label represents an irretrievably damaged brand and should be consigned to history.

Proposals for the Government’s attention include ideas to address NEST’s uncompetitive structure, and improving the effectiveness of the £30 billion spent annually on tax relief. Cash incentives (and a safe harbour) should be offered to employers who persuade employees to increase their pension contributions above NEST’s 4% of band earnings, reinstatement of the 10p tax rebate on dividends, infamously removed by Gordon Brown, and the replacement of the 25% tax-free concession on lump sum withdrawals with a pre-annuitisation “reward” (or “top-up”) of 5% of pot assets. All these proposals could be financed by scrapping higher rate tax relief. In addition, the Treasury should simplify the tax regime for investment products by ending the separate treatment for products with (usually cosmetic) embedded life insurance.

Note that this an abridged version of a longer (200 page+) report which is available for purchase on request from [email protected].