Kevin Brown: Pensions credibility gap

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Kevin Brown: Pensions credibility gap

Financial Times, April 25 2003

UK - Andrew Smith, the work and pensions secretary, was widely excoriated when he produced his long awaited pensions green paper in December for suggesting that there were no serious problems in the pensions system. Sadly for Smith, all the signs are that his timid paper is even less likely to resolve the crisis than his critics thought.

Twice a year, the research organisation MORI carries out a comprehensive survey of the state of the pensions and savings industry. As we report on Page 1 of Money & Business today, the latest survey, previously unpublished, concludes that the proportion of the adult population saving for retirement has fallen by more than 6 per cent since Labour's 1997 election victory.

The MORI survey underlines widespread concern about pensions in the face of scandals and the closure of many company schemes to new members. The proportion who strongly agreed that it was important to make adequate provision for retirement is up by 20 per cent to 60 per cent since 1997, with the proportion disagreeing down by 18 per cent to 32 per cent.

However, although 25m Britons over 16 knew about low-cost stakeholder pensions, the government's preferred alternative to personal pensions, only 1m were were likely to buy one.

The fall in pensions saving has been accompanied by a decline in other forms of saving and financial protection. The proportion of people with whole-life insurance policies has fallen to 18 per cent of over-16s, a reduction of nearly 6m in five years. The number with any kind of savings-based product is down by 4.5m.

Clearly, the three-year bear market in equities has played a part in this. Typical investors in private pension plans have suffered negative net returns over the past decade. And mis-selling scandals relating to personal pensions, endowment mortgages and split capital investment trusts have reduced investors' willingness to trust the savings industry.

But the survey also sheds light on another serious issue - the exclusion of less affluent people from the savings market because of the disappearance of direct sales, judged too expensive by almost all financial intermediaries. In life assurance, for example, 49 per cent of existing policies were sold by insurance companies' representatives or by direct sales, but only 27 per cent of new business is being done that way. Some of the slack has been taken up by independent financial advisers, who sold 24 per cent of existing policies, and are taking 37 per cent of new business.

But the virtual disappearance of direct sales has removed the most effective marketing and sales channel for reaching the less well-off, and those who either cannot afford to pay an IFA or cannot be bothered to. "The whole problem is that consumers want face-to-face advice," says Nick Barker of MORI. "If people earn £30,000 and can see an IFA, that is fine. But people who don't earn that kind of money probably need to be pushed into buying these products."

MORI's findings suggest that most people are willing to buy only very simple financial products online or by phone. For example, 69 per cent of those considering buying or changing motor insurance said they would do it remotely. However, 75 per cent of those considering life assurance wanted at least some element of face-to-face sales, and the proportion rose to 83 per cent for personal pensions.

This is bad news for the government, which wants the life and savings industry to encourage the savings habit by reducing its charges. Many pension sales are now capped at 1 per cent a year, the maximum allowable for stakeholder pensions. Ministers are consulting on whether that cap should also apply to a proposed new range of savings products proposed by Ron Sandler, the former Lloyd's chief executive, in a report last year.

Senior industry executives say that, if these products could be sold remotely, marketing costs would be low enough to encourage companies to market them. But if they have to be sold face-to-face because of consumer resistance to online and telephone sales, companies will be unable to make a profit out of savers who want to put by less than £100 a month. In practice, that means that the less well-off would be ignored. The companies want the cap lifted to allow some form of upfront payment which would enable them to recoup marketing costs quickly.

Treasury ministers are deeply sceptical; they think the companies are crying wolf. But it is rapidly becoming clear that the crisis is much more serious than Smith is pretending. Assuming that tax increases to provide a comprehensive state pension are ruled out, ministers will eventually have to decide between making pensions contributions compulsory and making a serious attempt to let the market solve the problem. To keep that option open they will have to back down on charges.