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Pension reform requires leading, not nudging

Pension reform requires leading, not nudging

Can we not be honest with people? Must we really be so patronising that we actually have to try to nudge their behaviours as opposed to leading from the front and telling people the hard, honest truth?

It appears that we must. The entire pensions industry is singing from the same hymn sheet in support of the forthcoming introduction of auto-enrolment enrolment, despite all its contradictions.

Of course, we’re all agreed that the country cannot afford to fund pensions at the current level in the future so it is vital that people start saving to provide for their own retirement. Indeed, the Minister for Pensions, Steve Webb, has made many speeches extolling the virtue of saving, warning people that the government will move to a new role where they will provide a standard, base pension to all but that any further improvement in their living standards after that can only come from each individual’s own prudence in deferring current pleasures for future financial security.

Strong leadership you might think. Indeed, many of the Minister’s actions to date are welcome simplifications of the system. So why does he shrink from applying the same simplification to the auto-enrolment process? At present, it is a mess of contradictions.

Firstly, it relies on the nudge process - enrolling people by stealth and hoping that inertia will prevent them from opting out. For those who opt out, the policy is to wear them down by re-enrolling them every three years and forcing them to opt out each time.

This is a sleight of hand that undermines the very principles of openness and transparency and worst of all, it is unlikely to work due to the contradictory rules coming from government regarding disclosure. These contradict the inertia approach by forcing pension providers to give regular updates about the value and projected value of these savings; at current auto-enrolment savings level of 8%, it is going to be difficult to make the final amounts look an attractive option in comparison to the pleasures foregone today.

Secondly, all the talk of making people responsible for their own future is undermined by the artificiality of the savings formula viz. 4% from the employee, 3% from the employer and 1% from the government. Any employee looking at that will not feel that pension saving is his or her sole responsibility – it appears to be a tri-partite split between the employee, employer and the government. The message becomes completely confused.

Thirdly, in reality, the government has no money, so that 1% is coming from the workers themselves and the employers 4% is coming from the wages of the workforce (just ask the Australians if you don’t believe this), therefore in reality the entire 8% is coming from the employees. Those who realise this will feel cheated and distrustful of the whole process.

What we need to do is to simplify the whole approach by removing the opt-out and charging the entire contribution to the wages. Yes it would look like a tax, but the current approach is like a trick tax that is only paid by those too stupid or lazy to cop on to the truth.

Leaders, not ‘nudgers’, brought about major changes in UK society; people who were not afraid to describe the future and bring it in. Bevan’s introduction of the health service wasn’t done on the sly nor was Thatcher’s privatisations.

Getting all citizens to take responsibility for their own futures is a huge change to society. The Minister needs to find some backbone and introduce the pension reforms unambiguously and unashamedly.

Tom Murray

Twitter: @TomMurrayDublin

What do you think? Is Steve Webb's simply nudging citizens instead of leading them? Voice your opinions in the comments below!

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