This month, like many employers, we have come in line with the latest auto-enrolment pension update requiring that all staff now put in 5% of their salary. Last week I emailed the four people in the company not yet giving 5% to tell them their pension contributions were going up.
I am completely in favour of making people pay more into their pensions. At nfpSynergy, we have tried our best to maximise the amount our staff contribute. We’ve moved to a salary sacrifice scheme and put all the National Insurance savings into increased contributions. We now match staff contributions up to 5%, and give an extra 1% for those who contribute 7%. When we give people a bonus, they get a bigger bonus if they put the money into their pension. It’s humbling to see a 25-year-old put £2000 into their pension when they won’t see that money for another 30 or 40 years. It is the real world example of the marshmallow test for children: will they sacrifice one marshmallow now for two in the future?
So as an employer we have done as much as we can to encourage people to put money into pensions with both carrot and stick. The carrot is us as the employer adding to their pension pot and the stick is being lectured by work-dad Joe about how important pensions are! The real challenge is that people under the age of 35 are hounded on all sides by financial pressures: repaying their student loans, saving to buy a house, and saving for a pension while trying to have a half-decent lifestyle.
The good news is that more people than ever before are saving for their pension. For me though, three big problems remain:
The problem of multiple, small pensions
The law now requires that all employees who earn more than a certain amount and work for an employer for more than three months must enrol in a pension (or opt-out). My daughter, working post-university to go travelling, was asked to join 3 pension schemes in order to contribute what would have amounted to a tiny sum of money.
If somebody moves jobs regularly, they could easily end up with 30 or more pension schemes by the age of 65. Even a relatively loyal employee who works for 15 employers for 3 years each could have 15 different pensions for 45 years of work. The task of tracking down all those pensions at retirement could be huge, not least if the pension pots have been sold on. People need to have a single pension pot which moves with them, in to which each employer can contribute to.
The problem of investment managers
Our staff funds are with Scottish Widows, and I don’t mind saying that as an employer I think they are terrible. They won’t tell me how much staff money is invested, how much its growing by, or give me any other information about our staff’s pensions. I complained to them and they upheld my complaint, but still gave me no information whatsoever. They cite data protection as to why we the employer, can’t know this information. So each member of staff has to manage their own pension pot. I can bet you that the default funds are Scottish Widows. If we moved to another pension provider, what would happen to all the pots of pension money from ex-employees?
The problem of investment returns
Linked to the problem of investment managers is investment returns. The best performing funds on the market have grown by over 100% in the last 5 years. The worst have barely moved at all. When a pension pot is left in a mediocre investment fund with a complacent investment manager, then the difference in the value pension pot is dramatic. My spreadsheet calculation shows that over 30 years, a return of 5% can nearly double an investment compared to 3%, and a 7% return produced a pot worth 3 times more than a 3%. And 7% isn’t a fanciful return – when the best funds have grown by over 10% a year. However, the fee structure means investment managers and IFAs have little incentive to shift funds. I have just discovered this to my personal cost where my IFA took their percentage, but left my pension in a mediocre fund for years on end. I am now choosing my own funds, and pick the best funds on the market. My sad and sobering conclusion is that every individual needs to make sure that their pension funds are growing at the best possible rate (in line with their ethical values).
No one party can solve all these problems. To switch to more of a National Insurance format, the government would need to legislate for every citizen to have their own portable pension pot (just like they do for national insurance contributions). Until that happens, every individual needs to make sure that they keep up with all their pension pots as their careers progress, and be aware of the return their funds are getting. One thing is for sure; it is only with the highest possible pension contributions, invested for the longest amount of time, growing at the best possible rates, that many of today’s millennials will have sufficient pensions when retirement comes.